The Money Speech

What Steve Jobs Did Well

2011-08-26T16:38:00.000-04:00

I guess I should join the chorus of commentators eulogizing Steve Jobs' tenure as CEO of Apple. Regardless of what you think of Jobs or of Apple products, you cannot deny that Jobs created substantial wealth for Apple shareholders, as well as for a slew of customers and suppliers. Many of the latter would not even exist were it not for Apple. There is an excellent op-ed in the WSJ today extolling Jobs' virtues as a man who created his own markets. This, I think, is one of his greatest strengths. He was not an inventor of much, but he was an innovator in that he could take new technology and find a way to make it palatable, even cool, to the everyday consumer. This allowed him to reap economic profits from industries that had become commoditized for all his competitors. He realized that he wasn't selling computers, he was selling a lifestyle. This realization allowed him to expand from computers into MP3 players, phones, tablets, etc., because he was just bringing the value proposition he offered to a wider range of vehicles. He has been compared to Thomas Edison in recent days, and I think that is fairly apt. At least, it is in the sense that Jobs' genius was not in inventing technology, but in finding ways to market technology (and I don't just mean advertising) so that it would really add value to people's lives.

I had previously written that I thought Jobs had done a terrible job of preparing his organization for his eventual exit. I believe this was true when he took medical leave in 2009, but I no longer think so. Since then, he has groomed the new CEO, former COO Tim Cook, for the job. Cook has effectively been running Apple since Jobs took on a diminished role in January. This has eased the transition, and allowed the incoming CEO to hit the ground running. The market knows Cook, the employees know Cook, and I think that Jobs will be effective in his new role as Chairman, providing some of his ingenious marketing insights, but otherwise staying out of managing the company. As evidence of Jobs' effective succession planning, note that even though Apple's stock price dropped 5% in after-hours trading when the succession was announced, by the time trading opened the next morning, that drop had been cut in half. That's as it should be. A good leader prepares for his eventual exit so that the organization barely notices when he bows out. Clearly everyone noticed, but I think that the questions about Apple's future will soon abate. This is all the more remarkable given the suddenness of Jobs' announcement.

So, here's to Steve Jobs, a man who in the last decade and a half created, out of nothing, roughly $350 billion in shareholder wealth. Not a bad track record for a career.

Two Great Perspectives on a Pretty Lousy Idea

2011-08-19T10:16:00.000-04:00

In today's post, we get two for the price of one. I am talking about a news story that brings us the wise musings of two capitalist ubermenschen. The other day, Starbucks founder and CEO Howard Schultz (not one of our story's heroes) proposed that CEOs pledge to withhold their political contributions until Congress and His Majesty hurry back to Washington and start brewing up some deficit reduction. While I'm all for lightening politicians' wallets, I have little faith that something like this would accomplish anything more than making Schultz feel less guilty for all the money he made charging too much for coffee.

Here is Paragon of Virtue #1 John Alison's take on the plan:

"If businesses and executives stop donating, does that mean pensions and unions will stop too?"

He makes a good point. Businesses don't really donate because they think politicians are doing a good job. They donate as damage control, and usually to counteract the efforts of...well...pensions and unions. The article from Reuters also mentioned Warren Buffett's monumentally stupid plan to tax the rich more (real original, Warren).

Here is what the article said about Paragon of Virtue #2 T. J. Rodgers, Founder and CEO of Cypress Semiconductor:

Rodgers, who said that more than half of his income goes to the state of California and to federal taxes, is no fan of the Buffett plan.

The CEO, who invests his money in start-ups and other ventures, said the government would "invest" the extra tax money "in pork barrel projects of dubious merit, controlled by political rather than market forces" without added benefit.

"The fact is, the country will be less well off if they're investing my money instead of me," said Rodgers, who added that he has "been on the Schultz plan forever" because he doesn't give money to political candidates.

Well put. It's nice to see prominent Objectivist businessmen getting called for their opinions on matters like this. I think it's a good sign.

Why I Will Never Buy Google Stock (Again)

2011-07-25T14:47:00.000-04:00

I think Google is a pretty good company. At least for the time being, they seem to be able to capitalize on their current strengths (search) as well as have an eye on future growth opportunities (Android). I think that they are currently fairly valued at about $600 per share. Last summer, when they dropped below $500 per share over fears about an aging business model, I thought they were undervalued and I bought. The stock went back up to $600 and I sold. This spring, the stock dropped below $500 again (same old fears, no new evidence) and I thought: "I should buy." But I didn't for one simple reason, and I subsequently missed out on the rise back to $600 that the stock experienced when it released its earnings. And I am not the least bit upset about not grabbing that opportunity.

The reason is that while I think Google's business model is sound, I don't trust the Justice Department to leave it alone. Google is the new Microsoft, meaning that one day or another, the government will see it as an unstoppable behemoth (tell that to Mark Zuckerberg) worth of an antitrust suit. The more successful Google's business becomes, the more likely this outcome. The writing is already on the wall. This is what antitrust does to strategy and investing. If the government decides that Google controls too much of search, their goes their revenue stream and shareholders take a haircut. Frankly, I just don't think it's worth the risk.

It is important to note, I think, that since antitrust came on the scene, most prosecutions are not instigated by the government, they are instigated by competitors complaining that the companies out-competing them in the marketplace are being "anti-competitive" by competing too well. This is what laws like antitrust do to competition. Firms succeed based on their ability to lobby the Justice Department and the FTC, not on their ability to provide superior value. Ironically, most of the antitrust threats against Google are coming from Microsoft. Now tell me, faced with an environment like this, why would a person of integrity ever want to go into business? They'd get eaten alive.

Why I Think News Corp Will Survive This Crisis

2011-07-20T14:56:00.000-04:00

For those who are unaware, News Corp, owner of half the world's media including Fox, Dow Jones, and a whole lot more, was recently embroiled in a scandal. It seems that employees of News of the World, a British tabloid owned by News Corp (at least it was until the paper closed last week), were hacking people's phones. And these weren't just any people's phones, they were, like, really pathetic people's phones. We're talking families of dead and missing children. Pretty sick.

Anyway, this has ballooned into a gigantic ethics scandal involving News Corp. CEO Rupert Murdoch, his son, bigwigs at Scotland Yard, and even UK Prime Minister David Cameron. Many have been talking about the 80-year-old Murdoch stepping down as a result of this embarrassment. News Corp. has already abandoned its bid to acquire the remainder of British media outlet BSkyB, and there are a lot of questions surrounding News Corp.'s future. Here is what I think about two of those questions:

Question: What will happen to Rupert Murdoch?

Answer: Probably not much. Murdoch's family owns 40 percent of that company. Odds are that he isn't going anywhere. Yeah, the press will beat him up, but the press has been beating him up for years because of his political views, so that's nothing new. A more interesting question is, "Should Murdoch step down?" To this I also say "no". At least, I don't think he should do it right now. Murdoch has built this company from the ground up, and it pretty much runs on his vision. Of course, he will die one day (some liberals' theories about him being a real-life Voldemort, notwithstanding), and because of this, it is crucial that he establish a succession plan. That would be the prudent action to take now. Develop a succession plan, and then gracefully bow out in about a year or so once all this mishegas has blown over. He could probably assume an executive chairman role, but pass on management of the firm to his son or to this apparently very capable second-in-command.

Question: How will this crisis affect News Corp.

Answer: It won't! Here's what makes crises potentially disastrous for companies. In any crisis, usually some stakeholder is hurt or perceives themselves as potentially in danger. In this case, it was some people who got hacked. In BP's case, it was a bunch of fish in the Gulf. In Toyota's case, it was all of their customers. What makes a crisis potentially disastrous is that the stakeholder who got screwed is the one buttering your bread. Yes, BP's stock tanked when they turned the Gulf into salad dressing, but their customers stopped buying BP gas for about a nanosecond. Their revenues stayed where they had been, and no one even remembers the damn oil spill. Conversely, Toyota (even though very little actually happened) appeared to put all their customers at risk. WOOPS! There go the sales.

Now look at News Corp. They hurt some people who were newsworthy. Here's the funny part: while some people may feign outrage, they're still tuning in to Fox News to learn about the scandal. Murdoch is actually making money off his own screw-up! Isn't capitalism awesome? Ultimately, we like hearing about this stuff, even though we may think it's wrong, and so the only way a media outlet could actually hurt themselves is to be boring (you listening, MSNBC?).

Government Efficiency

2011-07-18T16:11:00.001-04:00

My good friend A.J., who is currently proudly serving our country, sent me this delightful little anecdote:

I had to get a new hat because the Army changed from berets to soft caps. Then without warning, they moved up the date of the change, so instead of having a week to get one, I had...an afternoon. The military clothing and sales store on post that sold them was sold out of all usable sizes, and wouldn't have any more in for another week. After that week, I'd have to get rank sewn on, which currently had a 3-day wait. So I was basically stuck without the new hat I needed for about 2 weeks. Except that on the day I needed the hat, I walked into a small Korean alterations store, found an abundance of said hats, and got the rank sewn on in about 5 minutes. Whole thing was probably 50% cheaper than the process on post, as well.

What is the moral of this story? Yes, the government is a grossly inefficient bureaucracy and the military is no exception. But I think there is a more pressing issue here: 60 years later, Korea is still kicking our ass.

Two Perspectives on Job Creation

2011-07-15T12:11:00.001-04:00

Hi Everybody. My comprehensive exams are over (I passed), and now I can devote some time to blogging without feeling guilty. Today, I want to talk about "job creation" since that term has been batted around so much lately. I won't pull out any of Fearless Leader's quotes on the matter. I think everyone can predict my opinion of those. Instead, I want to contrast the statements of two high-profile business leaders.

The first comes from an article that appeared today on Investors.com, written by capitalist He-Man John Allison. For information on Allison, see some of my earlier posts. His article has several observations you would expect from an Objectivist. I won't get into all of them, but here's a choice sample:

Jobs are created so businesses can develop new products and services — and improve existing ones — and expand into new markets — and increase the quantities produced, and the efficiency of that production.

Sounds good, right? Jobs are not created as an end in themselves, but rather as the means to make more money. Contrast Allison's take on jobs with a recent article describing General Electric CEO (and Obama crony) Jeff Immelt's speech before the U.S. Chamber of Commerce:

At a conference where many of the comments were focused on government barriers to hiring, GE (GE, Fortune 500) Chairman and CEO Jeffrey Immelt acknowledged there needed to be some policy changes by Congress and the Obama administration. But he said that the responsibility for hiring lay with businesses.

"The people who are part of the business sector, the people in this room, have got to stop complaining about government and get some action underway," he told the group. "There's no excuse today for lack of leadership. The truth is we all need to be part of the solution."

Platitudes notwithstanding, what exactly does Immelt propose as action? What is the solution? Hire more. Don't worry about those pesky profits. Just hire more people, and stop complaining about how the government is making it impossible to hire more people. Just do it!

Okay, Orren. I mean, I understand that Immelt is basically working for Obama at this point, but does he have to be so transparent about it? Where's the finesse? Luckily, the rest of the Chamber didn't quite see things Immelt's way.

The Chamber also released a poll of small businesses that showed only 19% of businesses plan to add jobs in the next year, little changed from the 18% that increased their payrolls in the last year. Nearly 40% of those surveyed cited either worries about what the government will do next, the requirements of the new healthcare bill or too much regulation as the number one obstacle to hiring.

The comments also made me fell a little better:

JeddMcHead, 07/13/2011 11:40 AM
OMG, this tool needs to be put in the shed. Permanently.

Couldn't have said it better, myself.

Points for Honesty

2011-03-22T17:58:00.000-04:00

As I'm sure many of you have already heard, AT&T is trying to buy T-Mobile from Deutsche Telekom. Naturally, the antitrust goons have raised hell, along with Sprint who isn't real happy about the deal. I'm sure that I have discussed on this blog how Antitrust laws are the Jim Crowe of business regulations. They are the most unjust, indefensible business laws on the books. Being indefensible, they have garnered a creative assortment of proposed justifications of the economic, moral, and social varieties. The best one yet, the most honest and the most frightening, I heard a couple days ago while watching CNBC.

Steve Forbes was guest hosting, and they were interviewing one of Clinton's Fascist Communication Commission Chairmen by the name of Reed Hundt. They were talking about this acquisition, and Forbes asked Hundt something like "Don't you think that antitrust is fairly obsolete in this case? These aren't large manufacturing firms than can stifle competition. Competition in this industry is incredibly fierce between the two major players." Ignore the problems with that question for the time being. Here was Hundt's answer, paraphrased:

"Well, I've been an antitrust lawyer all my life, so if antitrust is obsolete than I'm in a lot of trouble."

I think that boils antitrust legislation--and most regulation--down to its essence. Antitrust is right because it's my job. Love it!

Who is Ron Swanson?

2011-03-09T20:12:00.000-05:00

In case you didn't catch my Ron Swanson reference in the last post, he is the Director of Parks and Recreation for the City of Pawnee, Indiana. He is the most amazing character on TV right now...after Michael Westen and Jack Donaghy. Here is a picture of him and his amazing mustache.

That's not the best part, though. This is what his bio says on the Pawnee, IN website:

Ron enjoys woodworking, breakfast meats, and the works of Ayn Rand.

'Nuff said.

An MBA With Some Meat to It

2011-03-07T14:02:00.000-05:00

This is pretty cool. Tired of being abused in the court of public opinion by terrorist-sympathizers like PETA, the National Cattleman's Beef Association has started training ranchers, butchers, and other meat purveyors in a program it calls the M.B.A: Masters of Beef Advocacy. No, I am not making this up, and yes, it is as awesome as it sounds. Here is the article about it. Here's a choice excerpt:

At the Denver training, South Dakota rancher Troy Hadrick—one of the first MBA graduates—told students about one of his recent triumphs.

It came about after Mr. Hadrick learned Yellow Tail wine had donated $100,000 and pledged $200,000 more to the Humane Society of the U.S., an animal-rights group that has embarrassed the cattle industry with undercover videos of slaughterhouse abuses.

Mr. Hadrick, outraged, set a video camera on a fence post and filmed himself dumping a bottle of Yellow Tail onto his snowy pasture while blasting the donations as an affront to ranching families.

Mr. Hadrick's video went viral on YouTube—at least among fellow cattlemen, who bombarded Yellow Tail with protest emails. Chagrined, the winery withdrew its $200,000 pledge to the animal-rights group.

I'm sorry, but how awesome is that? I think this is my favorite part, though:

MBA graduate Suzanne Strassburger, who sells steaks to high-end New York City restaurants, hasn't tried YouTube advocacy yet, but she says the course has helped her pump up her sales pitches. "It gives me more confidence" to talk about how the meat was produced, she said. And talk she does: Beef "is my love and my passion," Ms. Strassburger said. "This is what I get up for."

Amen, Sister. Amen! You gotta love people who love what they do. And few things combine quite as tastily as steak and capitalism. Just ask Ron Swanson. And if you don't know who Ron Swanson is, you do not watch enough good TV.

The Tao of Steve

2011-02-25T00:52:00.002-05:00

I have mixed feelings about Steve Jobs. In my quasi-academic opinion, the guy is a genius at marketing and a moron at management. His ability to provide value to customers--and to extract said value for his company--is unquestionable. However, he appears not to have cultivated a company that can run very well without him. As evidence consider the fact that he is away on sick leave, but still calling all the major shots.

This becomes an even bigger issue as he gets older and sicker, and as Apple eventually begins to deal with the problem of who will replace the one true CEO? At the company's annual shareholders' meeting, a group of shareholders proposed a measure that, according to the WSJ,

requested the board adopt and disclose a detailed succession planning policy that included the development of criteria for the CEO position, identification of internal candidates and the submission of an annual report to shareholders.

Now, normally I don't have a high opinion of shareholder proposals because, frankly, shareholders are mostly idiots. Just because you bought three shares of Apple doesn't mean you know anything about running a company. My policy on stock holding is that you own the rights to proceeds from the firm's business, not the right to exert any kind of control over the business. With limited liability comes limited rights. Sorry, I'm on my soap box again.

Anyway, the proposal doesn't sound so bad to me, given Apple's circumstances. But of course, the shareholders themselves voted it down. What I can't understand is why the board would resist this. My only thought is that they have bought into the Tao of Steve (it's a movie) and, like most Apple users I imagine, secretly wish that Steve Jobs would stick around until the next millenium. The fact is, before too much longer he will have to step down, and it would be nice for Apple's stock price if the board had any clue how they would respond to that.

Again, I don't really like shareholder proposals, but it wouldn't be a bad idea for the board to communicate that they are thinking about these things.

More About Unions

2011-02-23T00:22:00.000-05:00

Unions just seem to be topic of the week. Right here in good, old Indiana, the Democratic legislators have taken a cue from the whack jobs in Wisconsin and gone on vacation. This issue here is a little trickier than in Wisconsin, which is just a bunch of whining. The fight is over a "right-to-work" legislation that Republicans want to push through. Democrats don't like it because it hurts unions. Ok, so far no surprises. The question for me is what this proposed law actually says. I'll show you what I mean. Here's how the Wall Street Journal wrote it:

At issue in Indiana is a so-called right-to-work bill that would give members of private-sector unions the right to opt out of unions and not pay dues.

The right to opt out of unions? I like rights. That sounds good. Did they not have that right before? Who denied them that right? On the surface this looks like a good thing. Then I read this from both the Indianapolis Star and that bastion of quality journalism, USA Today:

[The legislation] bars a union and company from negotiating a contract that requires non-union members to pay fees for representation.

Barring? I don't like barring. That sounds bad. It seems to me that the Republicans are engaging in a major PR cover-up here, masquerading their strictly anti-union bill as an expansion of liberty. Of course, the Democrats aren't any better, because they're just throwing a little hissy fit because the bill hurts unions.

I'm not the biggest fan of unions, but there's nothing inherently wrong with them, as long as they play by the same rules as everybody else. If a business wants to (or has to out of necessity) contract with a union agreeing it won't hire non-union folks, so be it. I think it's a stupid idea, but sometimes that's what you need to do in business. Barring certain kinds of contracts is not the way to make the state more competitive economically.

Taxes Suck

2011-02-21T21:44:00.002-05:00

I just filed my 2010 taxes. The government sucks. That's all.

We're Back!

2011-02-20T18:28:00.003-05:00

Ok, now that I've been enmeshed in school for a year and a half, I feel like I finally have enough of a handle on things to devote 10 minutes every couple days to discussing current events with the interwebs. As such, I'm bringing back The Money Speech. For those of you who have missed my flurry of questionably insightful comments, this is for you. For the rest, well, you probably didn't read my blog anyway, so we're all set. So, sit back and enjoy as I occasionally pepper your brain with disconnected thoughts on what's going on in the world today. Because, frankly, the world's too f*cked up these days not to comment on it. (This is a family blog)

To get us going, I will simply offer a rambling tirade about these protests in Wisconsin:

You know what Wisconsin public servants? Grow up. Right now. Seriously, I'm tired of this sh*t. You pay way less toward your health insurance than practically anyone in the private sector. You get a defined-payment pension which no one gets anymore because it's a fiscal disaster of an idea. "You mean we actually have to contribute something to our own retirement account? How unfair." Yes, time for you people to start acting like grownups and actually pay for some of your time past age 55!

Here's the bottom line, and this message is for all my friends who fall asleep at night dreaming blissfully about getting sick in Canada. If you want the government to provide something, get ready for the government to actually make decisions for you. You want them to provide schools? Get ready for education to become a matter of public opinion. You think teachers' benefits getting cut is bad? Take a trip down to Texas where voters have decided that the entirety of science can be learned from the first ten pages of Genesis. Another vocal group down there wants to teach children that America was founded by a poor black child from Mexico City.

Wait, why stop there? Now that the government is going to be more entwined with healthcare than ever before, we have Republicans redefining rape so that they will have to pay for fewer abortions. Isn't democracy awesome? But it's so great that we've put the government (a.k.a. idiot voters) in charge of all this.

Boy that felt good. I'm glad to be back.

Score One for the Good Guys

2009-08-17T09:23:00.002-04:00

Prime capitalist institution, BB&T, has asserted itself as a healthy, thriving bank amidst a sea of faltering behemoths. Now, as the economy starts to show signs of life, the bank is breaking out of the gate and gobbling up its weaker competitors who made destructive lending decisions back in the day.

On Friday, BB&T acquired most of Colonial Bank Corp.'s deposits and assets through the FDIC's seizure of the bank. (Don't get me started on that whole process.) This will make BB&T the 8th largest bank in the US by deposits. That's good for us shareholders. (Incidentally, size of a company is most certainly not always a determinant of success, but with a company like BB&T, added market share means more opportunities to apply its winning strategy.)

Important to all friends of Objectivism, however, is the heightened profile of the bank. Take, for example, this WSJ article about the purchase, which mentions capitalist ubermensch John Allison, as well as Objectivism. Here's a slice:

Before Friday, BB&T had about $152 billion in assets, 29,000 employees and operations in more than 11 states. It will purchase an additional $22 billion in assets in the Colonial deal. Mr. Allison, an adherent of Objectivism as practiced by author Ayn Rand, shaped the bank's behavior around his philosophical outlook.
"BB&T Values," a 30-page guide to the company's 10 core principles, written by Mr. Allison, asks employees to practice "reason," justice," "productivity" and "independent thinking."
Employees are encouraged to adopt these principles at the nearby BB&T University training center.
The bank also has long opposed government intervention in the private sector, refusing to lend to any landowner who acquired property via eminent domain. BB&T did accept federal bailout money last year, but was among the first to pay it back. The day the company got approval to return the capital, executives, including Mr. King, cheered.

Other than the fact that the authors neglect to mention that BB&T was forced to take the money, this is very good coverage for the bank, Allison, and the philosophy. It implies that the bank's guiding philosophy put it in a position to be able to succeed in the current business environment.

Very positive stuff.

The West Bank Has A Stock Exchange?

2009-08-14T09:18:00.003-04:00

This is a really heart-warming op-ed from the WSJ written by the Israeli ambassador to the United States. It's called "The West Bank Success Story," and in it, Ambassador Oren discusses the progress that the West Bank has made economically just in the last year. I want to include an extended excerpt here, because I think what he says is extremely important.

Since 2008, more than 2,000 new companies have been registered with the Palestinian Authority in the West Bank. Where heavy fighting once raged, there are now state-of-the-art shopping malls.
Much of this revival is due to Palestinian initiative and to the responsible fiscal policies of West Bank leaders—such as Prime Minister Salaam Fayyad—many of whom are American-educated. But few of these improvements could have happened without a vastly improved security environment.
More than 2,100 members of the Palestinian security forces, graduates of an innovative program led by U.S. Gen. Keith Dayton, are patrolling seven major West Bank cities. Another 500-man battalion will soon be deployed. Encouraged by the restoration of law and order, the local population is streaming to the new malls and movie theaters. Shipments of designer furniture are arriving from China and Indonesia, and car imports are up more than 40% since 2008.
Israel, too, has contributed to the West Bank's financial boom. Tony Blair recently stated that Israel had not been given sufficient credit for efforts such as removing dozens of checkpoints and road blocks, withdrawing Israeli troops from population centers, and facilitating transportation into both Israel and Jordan. Long prohibited by terrorist threats from entering the West Bank, Israeli Arabs are now allowed to shop in most Palestinian cities.

Considering the state the West Bank has existed in for half a century under the tyranny of religious rule, this is amazing news. For anyone familiar with the region, or who has even gone there and seen what the West Bank looked like (I was there at the end of 1999), the concept of shopping malls, movie theaters, foreign cars, and even a stock exchange is baffling.

I also find it to be an interesting example of how important the rule of law is. For years, the Palestinians have wavered somewhere between fascist centralized control and a sort of anarchic psychopathocracy. Introducing a consistent protection of individual rights, those of the Palestinians as well as the Israelis, is integral to forging an economic relationship between the two peoples. The possibilities for peace that arise from the scenario are enough to bring tears to one's eyes.

Oren also notes the contrast with Gaza, where the psychopaths continue to reign supreme, spending their money on rockets instead of shopping malls. Perhaps one day, if the West Bank pursues a pro-capitalist policy, enforcing property rights, the two regions on either side of Israel will become another study in opposites like East and West Germany or North and South Korea.

Honda, Who Knew?

2009-08-07T13:18:00.003-04:00

I needed to look up something about Honda's Indiana plant for work, and this popped up in front of me when I opened the indiana.honda.com website:

The Human Being is born as a free and unique individual with the capacity to think, reason, and create--and the ability to dream. "Respect for the Individual" calls on Honda to nurture and promote these characteristics in our company by respecting individual differences and trusting each other as equal partners.
-Honda Philosophy

It's always nice to see reason and individualism promoted by a large corporation, even if inconsistently.

A Quick Thought About SEC Fines

2009-08-05T13:59:00.003-04:00

In reading an article in the WSJ today about how the SEC has reworked its rules to allow confiscating executives' pay, even if the executives are not accused of any wrongdoing, something occurred to me. The SEC was founded in the 1930s to act as a protector of shareholders' rights. (Go ahead, laugh.) The idea was that businesses had become so large that their management was effectively kept hidden from the view of their owners. Theoretically speaking, there is nothing wrong with appointing a group of people to enforce laws against corporate fraud. Defrauding one's investors is a violation of their rights, and it is the government's job to defend against such injustice.

This, however, is not what the SEC did then or does now. The SEC concocts a bunch of hoops for managers to jump through, lest they be fined or thrown in jail, ranging from the grotesquely immoral to the just plain silly. The penalty for fraud is typically a corporate fine, paid to the SEC for some reason, and sometimes personal fines and/or jail time for executives depending on the crime. Similar punishments are doled out at the state level by rabid attorneys general like Elliot Spitzer.

What occurred to me is that the crimes are supposed to be violations of shareholders' rights, via mangerial fraud. And the punishment is a fine, which will be paid by who? That fine is coming right out of the shareholders' bottom line. So shareholders get screwed twice: once by the fraudulent management, and then again when the SEC fines them. This is, of course, assuming that any fraud existed in the first place, which may or may not be true.

This is just a little ammunition if you're ever in an argument and someone maintains that the SEC is necessary to protect innocent shareholders from unscrupulous executives.

Green Jobs

2009-07-29T08:54:00.002-04:00

I've been working on a "green jobs" article the past few days for my job. I read way too many state and non-profit reports on the "green economy" and "green jobs," and then wrote up a comparison of different approaches. I will say it has been interesting to see the different methods used, and the different ways to define the ubiquitous, and too-often malleable, concept of the green economy. That said, the process has been as infuriating as it has been enlightening. A few thoughts:

For one, no study that I read mentioned any downside to the "greening" of the economy, as it is called. Going green is universally acknowledged as the saving grace of the US economy, the thing that will launch us into the 21st Century. This in spite of the fact that even the most optimistic studies put green jobs at somewhere between 3 and 4 percent of total employment. Since green is universally good then, these researchers never seemed to meet a green proposal they didn't like. No mention of opportunity costs, no mention of profitability lost by diverting resources to money-suck projects like wind farms. Certainly no mention of individual rights. What are you, crazy?

Second, the identification of a green job is difficult. Is the term limited to those employed at "green firms" like solar power manufacturers? Or does it include workers at non-green firms that perform green functions, like updating production lines to be more environmentally friendly, whatever that means. This creates discrepancies in final jobs totals on a scale of about 3.

Third, identifying a particular job activity as green is suspect. One study I looked at found hundreds of glaziers to be "energy efficient" jobs. This data was reported by employers in a survey. Glaziers, for those of you who've never worked on a house, are the people who apply glazing to windows. Glazing is the stuff that forms a seal on the outside of the window between the glass and the wood of the frame. Since it's used on wood frames, it's typically used on older houses. Nevertheless, I had a difficult time understanding how this job, one that's been around basically since glass windows were invented, could be anything but green. By keeping the pane in place, you are necessarily increasing "energy efficiency." Not much regard for marginal effects in this study.

What I'm trying to say is that the green economy consists of two components: economic activity that adds value by saving people and businesses money on energy, and economic activity that couldn't exist without coercing people into supporting it. This means that the policy implications are none for the former, since it will occur just fine on its own, and "stop, stop, for the love of god stop!" for the latter, since it shouldn't occur, EVER.

Not Very Accomodative Islamists

2009-07-21T15:18:00.002-04:00

There's an interesting op-ed in the WSJ today by a gentleman named Sadanand Dhume. He is writing about the American hotel bombing in Indonesia. Specifically, he makes the case that American hotels are signs of Western influence that Islamists want destroyed. The writer makes the refreshing argument that Islamists' preference for attacking Western hotels is based on deeper premises than the sheer practicality of sneaking weapons into a place designed to be accomodating. He writes:

For Islamic radicals, who seek to order all aspects of 21st century life—from banking to burqas—by the medieval precepts enshrined in Shariah law, the secular nature of a hotel is galling enough. But perhaps this would not matter as much if it weren’t appealing to local elites. In a place like Peshawar or Kabul, and to a large degree even in Jakarta or Mumbai, a five-star hotel represents an island of order and prosperity in a sea of squalor. It hints at the prosperity promised by free markets and a culture of individual liberty. It is living proof that the worldly can successfully be split from the divine.

I'd say that's pretty much on the dot. He also discusses the necessarily secular nature of hotels, as they cannot display any religious preference, lest they lose a sizeable chunk of international clientele to competition.

Here is another example of how globalization is bringing the civility of capitalism to the Muslim world. At the same time, however, the dark ages philosophy prevalent in those societies is growing more and more violent in its resistance.

Shut Out of the Aristocracy of Pull

2009-07-18T10:15:00.002-04:00

Well, the Aristocracy has revealed a financial services firm who isn't on their list. CIT, a company I hadn't heard of before this week, looks like it will go under this week barring some big infusion of private capital. The firm is a big lender to small and medium-sized businesses. I didn't think much about it, until I saw this WSJ article: The CEO Left Off the Lifeboat. According to this article:

On June 17, Jeffrey Peek, chief executive officer of CIT Group Inc., spoke at a conference in the nation's capital where the keynote speakers were Federal Reserve chief Ben Bernanke and Federal Deposit Insurance Corp. Chairman Sheila Bair. His real mission there, Mr. Peek told others, was to raise his profile among Washington's movers and shakers.

This week his politicking foundered, as the U.S. spurned pleas for financial aid from CIT, one of the nation's largest lenders to small and midsize businesses.

Yep.

CIT had been trying for months to improve its connections in Washington. It spent close to $90,000 last year on lobbying, and $60,000 in the first quarter of 2009. It brought onto its board of directors former Congressman Christopher Shays, a Connecticut Republican.

One day I will conduct a study on the use of politicians on boards of directors. It's a really scary trend. And finally, there was a description of CIT's CEO that was one of those paragraphs that makes you double-take, and question you were reading a description of Jim Taggart, a description that is becoming far too ubiquitous:

He installed CIT's top brass in a glitzy office building on Manhattan's Fifth Avenue, eschewing the company's historical base near a big shopping mall in Livingston, N.J., and brought CIT into his high-society orbit as well. CIT became a sponsor of the New York City Opera. Its role as a donor to the Metropolitan Museum of Art may have helped Mr. Peek win a prestigious spot as a museum trustee in 2008.

Mr. Peek threw parties both at the office and in his home. At an Edwardian-themed fete at his home on Valentine's Day 2008, male guests donned top hats provided by the Peeks.

Mr. Peek is a "personable, likable guy" who showed incredible recall for names and personal details, said one former top CIT executive. When he arrived, Mr. Peek criticized CIT's culture, which he deemed too cautious, says the former executive. He hired a psychological-evaluation firm to "understand us," the executive recalled, and used the results to hire hundreds of new sales people who didn't fit the old CIT mold.

Not that there's anything wrong with supporting the opera, but you get the idea. I suppose it's a good development that the Powers have stopped finding "systemic risk" around every corner, but it could simply be that none of them had the requisite number of connections to this guy and his company. I don't really know what to read into this development. The whole situation is just kind of sad.

In other, better news, Mark Cuban is off the insider-trading hook. That's good.

Finance Bitch #1

2009-07-12T09:45:00.002-04:00

The Obamanons are rolling out some convoluted derivatives regulation, and there is some discussion over how this might hurt airlines, farmers, and other "real" companies--as opposed to financial firms. Pathological hatred of bankers aside, I want to explain what I think is a very important detail in this discussion, especially as oil prices are rising and the bogeyman of "speculators" comes back. Incidentally, the price of oil dropped last week, so people stopped talking about speculators for a week.

Anyway, I'd just like to make sure all my readers understand the two main reasons that derivatives are used. Derivatives are, as their name suggest, financial instruments that derive their value from other assets. There are several kinds of derivatives, the main categories being futures, forwards, options, and swaps. Futures are standardized contracts that guarantee the delivery of a certain asset--say, oil--for a pre-specified price. Forwards are similar contracts, except that they are not standardized, but rather custom-made. Options give the holder the right, but not the obligation, to purchase or sell an asset for a pre-specified price. This is how stock options work, with the hope that the holder will work to improve the stock price and make it in his interest to exercise the options. Finally, swaps, the much-maligned instruments that AIG used, are actually very useful, and involve the "swapping" of cash flows on different securities.

Now, here are the two main ways derivatives can be used: to hedge or to speculate. Hedging consists of balancing out a long (profit when prices rise) position with a short (profit when prices fall) position. For instance, a farmer who sells corn might sell corn futures so that he can sell his corn at a known price instead of hoping that the price rises when he goes to market. When he grows his corn, he is long, and thus his future creates a balancing short position in corn.

Speculating, contrary to popular political wisom, is not a form of 21st Centural witchcraft. In fact, it is simply the opposite of hedging, whereby the investor takes either a long or short position in an asset, without balancing out the position. If you own stock and don't simultaneously short the stock, you are speculating in that stock. Similarly, if a bank wants to purchase an interest-rate swap to hedge against movements in interest rates, you can speculate in certain interest rate movements by taking the other side of that swap and not hedging yourself. To bring it closer to home, if you buy health insurance, you are shorting your health in order to balance out your automatic long position in your health. The insurance company, on the other hand, is taking an unhedged long position in your health.

Ok. Now you know.

Innovation, If We Let It

2009-07-09T23:44:00.004-04:00

Sorry I haven't been blogging in a while. I've been sort of busy. Today's post will be short. I simply have had a thought over the last few days. I've been reading several stories about innovation in the tech sector. Apparently, Google is coming out with its own operating system. At the same time, Microsoft is scrambling to replace the disastrous Vista. Similar movement is happening in the internet browser market. Conversely, Microsoft is trying to chip away at Google's dominance of the search engine market. Microsoft, despite having immense "market power" as the economics buzz word goes, continually has to innovate for fear of losing market share.

It is amid this whirlwind of creativity that the gruesome specter of ANTITRUST rises from its shallow grave like Jacob Marley, complete with ludicrous Dickensian morality. His Majesty's Justice Department understands Antitrust as the club it really is, and intends to use it as such. Microsoft and Google already need to dance around antitrust in hopes they don't compete too well to be labeled "anti-competitive." Obama is sure to extort some rents from them, the same way that the Clinton White House did with Bill Gates in the 90s. Also, hearings are being held on that pimple on the face of our nation known as Capitol Hill, ostensibly to determine the appropriateness of allowing cell phone makers to grant exclusive offering rights to service carriers, a la the iPhone.

I've said this before. After the murderous thugs at the FDA, anyone who would enforce Antitrust should be next in line for tar and feathering. This is a criminal legal quagmire, whose express purpose is to trap every business in its confusion, thus forcing all to bow to the whim of whatever feckless poll-dancer happens to be anointed our Leader. Draw what conclusions you may from that. I'm going to bed!

P.S.: For some excellent discussion of the current application of antitrust, reading any of ARI analyst Alex Epstein's writings on the subject.

Shabbos Banker

2009-06-28T11:45:00.003-04:00

Here's an interesting little story I noticed some time ago in the Economist. Apparently this gentleman, Adnan Yousif, has great ambitions for his particular brand of financial innovation. He is trying to rock the Arab financial world with what is currently only a niche industry. "People never thought big here, never thought globally," he says. Sounds good, right? Guess what this innovative service is...

Islamic Finance.

Now, you may be asking, as I did, what makes finance Islamic? According to the article:

Mr Yousif’s ambitions date to the founding of modern Islamic finance. During the 1970s oil boom the Gulf’s Muslim elite needed to put their new-found wealth somewhere, and American government bonds seemed the safest option. Yet Islam prohibits the charging of interest. So some sheikhs bought bonds but let their Western banks keep the interest, in the casual manner of a customer leaving change on a restaurant table. To Mr Yousif, then a young banker at American Express in his native Bahrain, this made no sense. At a time when Muslim countries had imposed an oil embargo over America’s support for Israel why, he wondered, refuse the Americans oil but give them billions of dollars?

So, nominally Islamic finance is about handling money without interest. Really, it's answering the question "How do we stick it to the Americans more efficiently?"

This concept of Islamic Finance--which seems to be simply replacing evil, unholy interest with "fees" and other equally silly price mechanism substitutions--reminds me of the Jewish concept of the Shabbos Goy.

For those of you unacquainted with the endearing habits of the Children of Israel, and please remember I am not making this up, "goy" is Yiddish slang for a gentile. Shabbos is the sabbath. In Jewish law, you are not allowed to do any work on the sabbath, including, but not limited to, turning on lights, starting a car, and even ripping paper (Yes, that includes wiping your ass, unless you have pre-ripped your sheets.

This poses a great problem for modern observant Jews. While, back in the good ol' second century b.c., one could easily avoid turning on lights or ripping toilet paper, such actions have become, to say the least, ubiquitous today. So what's a poor Jew to do? Why, hire a goy to do it for you, of course. Hence the term "Shabbos goy," a gentile who you hire to do all your sinful car starting for you on the sabbath. (Of course, you must pay the goy during the week, because handling money is also forbidden.

Returning to Islamic Finance, then, I find the practice funny--and sad--as it is simply a way for the faithful to pretend they're obeying God's ridiculous edicts, while still getting everything they want. They missed the whole point of being religious, which is the ample amount of suffering God wants you to endure.

In all, this is probably a good development, as the more integrated backwards religions get with civilized life, the more people decide, "you know what? This is stupid," and just junk the whole process. That's what happened to me when I attempted to keep kosher when I was young and naive. I thank God I grew out of that. If it weren't for him, I might never have turned atheist.

Fighting Back by Opting Out (Or Going Galt, If the Term Appeals to You)

2009-06-24T08:46:00.003-04:00

It looks like Amazon.com is battling encroaching tax hikes the only way companies can these days, by withdrawing their business. The WSJ reports that Amazon threatened California legislators that they would end marketing affiliations with anyone in California if a proposed online sales tax is implemented. They made similar threats in North Carolina and Hawaii. They argue that the law is unconstitutional, and I think they're trying to preempt a court battle, which they aren't likely to win. Apparently, they and Overstock.com are fighting a similar sales tax in New York in court. Since the courts are basically useless these days, the only option is to cease business in any economically viable manner. Hopefully, the threat will make some in Sacramento stand up and take notice of the value that their tax victims provide to the state.

In other news, as anyone with a modicum of reasoning power should have been able to predict, financial firms are having trouble attracting top executive talent. While many hot-blooded capitalists would jump at the chance to revitalize troubled institutions, the prospect of being a government bureaucrat has a tendency to temper enthusiasm. I like this description:

At Citigroup, Jerry Grundhofer, the former chief executive of regional bank U.S. Bancorp who recently joined the New York company's board as part of a government-driven shake-up, is viewed as a strong potential successor to Vikram Pandit.
But Mr. Grundhofer, 64 years old, has expressed concern about the relatively low pay that likely would come with the job, along with the difficulty of leading a company that is so entangled with the U.S. government, according to people familiar with his thinking. The government soon will own as much as 34% of Citigroup.

Yeah, I don't blame you, Jerry. Who would want that job? No one worthwhile, as would be expected.

Governance Issue at Apple

2009-06-20T10:57:00.003-04:00

Recently, Apple has provided a very good example of why CEO succession planning is so important. According to the WSJ, Steve Jobs recently underwent a liver transplant. We all knew he was sick, and he's been away on leave for a little while. Apparently his #2, COO Tim Cook, has been running the day-to-day business in Jobs' absence, and now it appears he's being groomed to replace Jobs. This is a very good idea, and it's lucky that Jobs got a second chance to do this before exiting Apple completely.

In any corporation, but especially in one as large and innovative as Apple, well-done CEO succession is vital. Leadership is everything in a business where extraordinary vision is required simply to stay with the competition. Because there wasn't an heir apparent at Apple, when Jobs got sick, shareholders were rightly perturbed that his health was being kept a close secret. Frankly, the fact that they could keep a liver transplant secret for so long amazes me. Shareholders need to be sure that their company will transition into capable hands in the event of a CEO's sudden departure, as well as in the event of a planned departure. It's just as important as the Presidential line of succession, at least to the firm's shareholders.

Now, here's the really interesting part. As some very intelligent Kelley School of Business professors (I'm not biased) found in this paper, inside directorship (placing top executives on the board) is a very common and useful funnel for selecting a firm's next CEO. Accordingly, the WSJ article says that Cook is likely to be placed on Apple's board. So, it's pretty clear that he's the next in line. However, thanks to Sarbanes-Oxley, inside directorships have been limited, and now the average number of non-CEO executive board members in the Fortune 500 is less than 1. This makes it much more difficult to groom a capable successor. Thanks again, government.

Hopefully Apple will be able to navigate through Jobs' eventual exit. They seem to be taking the appropriate actions to ensure that now, albeit a little late.

Bullshit

2009-06-17T08:43:00.002-04:00

Yesterday, His Majesty said in an interview that he aspires to a "light touch" when it comes to government intervention into the financial industry (article). Apparently, Larry Summers, one of The Chosen One's top economic advisors said in a speech the other day, "No, we're not socialists." It is in this type of scenario when one might say that actions speak louder than words. That is, except when your words get as much media attention as The Obama's.

Obama said, "The only real regulatory approach I've been interested in is raising fuel-efficiency standards so we can wean ourselves off dependency on foreign oil. Beyond that, the last thing I want is to be running a car company..." That, and little things like hand-picking members of the executive team and board of directors, but those aren't such a big deal.

Team Obama seems to have a pretty good system worked out. Instead of making a philosophical case to the nation for their policies, they simply carry out their policies and publicly deny that they're doing anything out of the ordinary. Observe:
1. Control a car company
2. "We don't want to control car companies"
3. Control a second car company
4. "We don't want to control car companies"
5. Give car companies more money
6. "We had to, otherwise they'd go bankrupt
7. Organize out-of-court bankruptcy
8. "We had to, otherwise the bankrupcty would be messy"

The concept of an "orderly" bankruptcy is a funny one, and yet administration apologists have been throwing it around a lot lately. "Orderly" is code for "make sure our friends don't get the short end of the bankruptcy stick, even though their claims are subordinate to those belonging to people who aren't our friends."

Just another example of the bullshit that is obfuscating our path to destruction. But otherwise, I guess it's been a good week.

Thank Goodness for Congressional Democrats

2009-06-10T08:58:00.003-04:00

You heard me. In the ongoing war between politicians' evil and their stupidity--that is, between their desire to control and their complete inability to get even that right--Congress slipped some language into the bill limiting executive pay at TARP-receiving banks that essentially made it easier for banks to pay back the money sooner. The Treasury wanted to hold onto those claims for, well, let's just say awhile. Congress did this in order to justify slapping onerous restrictions on how banks do business. I think they honestly convinced themselves that all the banks needed the money.

So, happily, our benevolent overlords at Treasury announced yesterday that ten banks would be allowed (did you catch that, "allowed") to repay the TARP money that most of them didn't want in the first place. Hallelujah. Naturally, BB&T, The Money Speech's favorite bank bar-none, was one of the ten. Kelly King, their new CEO had a good quote:

This is an important achievement for BB&T....Repaying the government's investment will give us greater flexibility to benefit significantly from future opportunities that will be available as we emerge from this recession. In addition, we will become even more focused on the business of serving our clients, rather than dealing with government distractions.

That's over-regulated businessman speak for "Get the fuck off my lawn, government." A BB&T spokesman had another good line: "I haven't seen anybody swinging from the chandeliers yet, but obviously this was the result we wanted." These quotes are getting more than proportional press time, and I think it's due to the fact that the other spineless bank executives won't call the government out. Regardless, I must say I feel much safer as a BB&T shareholder, safer in the knowledge that the bank will, more or less (it is a regulated institution, after all) be run with my financial interests at heart.

Indiana Pension Fund Stands Up for Bondholders' Rights

2009-06-09T08:58:00.003-04:00

In what might end up being a stunning blow to Obama's constant efforts to annihilate the concept of individual rights, the Supreme Court has put a stay on Chrysler's sale to Italian car maker Fiat. The suit was brought by Indiana pension funds, major Chrysler bondholders, who are claiming that the Administration's orchestrated bankruptcy plan for Chrysler elevates junior debtholders above secured, senior debtholders. This claim is quite true.

The Obamanons have been involved in a systematic reorganization of justice in this country, whereby the deserving subsidize the undeserving. If you saved money and didn't go into reckless debt, sorry. Obama's upping your credit card fees and your mortgage rates so that deadbeats aren't "unfairly" punished in debt markets. Did you run your business well over the past decade, building goodwill and a reputation for sound business practices? New regulations will make sure that your claim to any strategic advantage over your competitors is wiped out, and by the way, you need to take government money so your faltering competitors won't look bad to the capital markets.

Hopefully, the Supreme Court will rule that the Chrysler deal is invalid, and Chrysler is liquidated, rewarding senior debtholders first, as any minimal recognition of property rights demands. Encouraging is the penion funds' lawyer commenting that GM bondholders have contacted him about working on a similar suit for them. Hopefully, both groups will get the bankruptcy proceedings they merit as debtholders, and not the pandering backroom dealing we've come to expect from His Majesty.

Update 6/10: The Supreme Court gave the Chrylser sale the go-ahead. So much for bondholder justice.

A Couple Newsworthy Items

2009-06-05T09:15:00.003-04:00

As part of the U.S.'s continuing endeavor to accumulate more czars than a Russian graveyard, His Royal Highness has appointed yet another overseer to make sure that we, the people, don't make too many decisions on our own. Yes, that's right, it's now time for the nation's first "Pay Czar" to take center stage. You heard me; a gentleman by the name of Kenneth Feinberg is going to be named to "interpret" the many conflicting TARP pay package restrictions that the foaming-at-the-mouth Congress passed in the last nine months. He's going to make sure that greedy capitalists who took (read: had foisted upon them) public money aren't taking too much home. What is too much, you ask? Shut up! Stop asking questions. Actually, I shouldn't call him a czar. The title being floated by the Administration is--I shit you not--"Special Master for Compensation." Honestly, sometimes I don't think they realize how often they parody themselves.

On a happier note, Amity Shlaes, the author of the magnificent Great Depression history, The Forgotten Man, has a good article on Bloomberg.com about Atlas Shrugged, its relevance, and its influence in today's culture. If you haven't read her book, stop what you're doing and go get it. Especially today, when the Obamanons appear dead-set on repeating the mistakes of the Roosevelt administration, it is crucial that people educate themselves on what really happened in the 1930s. In the Bloomberg article, Shlaes at one point compares Shwarzenegger to one of the politicians from Atlas. It's pretty dead-on.

Wise Words from Governor Daniels

2009-06-03T14:35:00.003-04:00

A few days ago, I found myself trolling around the state of Indiana's website, and I discovered the transcript from the commencement speech Governor Mitch Daniels gave at Rose-Hulman Institute of Technology (In case you are unaware, this is one of the premier engineering schools.) I've often found that Daniels has a pretty good head on his shoulders, and when I met him he did express admiration for Ayn Rand and her works, occasional pragmatist though he is.

This commencement address surprised me, then, in its defense of talent, skill, production, and rationality, grossly uncharacteristic of a politician's speech. Here are a few of my favorite snippets:

"Amid grade inflation, dumbed-down SAT tests, and stagnant academic performance across most of American education, you chose the harder path. Your self-esteem was hard earned, not conferred as an exercise in social work. If any graduates in America today are ready for the tough world of a prolonged recession, you are."
"The Marines once had a recruiting slogan: "No one wants to fight, but somebody better know how." Today as never before, winning the world economic combat depends on someone knowing how to do the hard work of innovating, enhancing, designing and redesigning new goods and services, creating the kind of value some purchaser is willing to pay for."
"In case that's not already too heavy a load to lay on you, here's more. Even while you're designing, devising, and deploying the innovations that make tomorrow better, I hope you will make time to be active, vocal citizens. Our nation can no longer afford the luxury of its best scientific minds tending to their technical knitting and leaving major public decisions to the lawyers and career politicians.
The U.S. Congress contains eight times as many lawyers as scientists and engineers. In the Indiana General Assembly, only five of one hundred fifty members have a technical background. There is an endearing, but risky tendency for people of science and engineering to concentrate so passionately on the work of invention that they absent themselves from major debates on which their expertise is sorely needed.
I had a dream. A revolution erupted and the mob took all the most talented people to the guillotine. They put a banker in the stocks, but the blade didn't drop and, under the prevailing custom, they had to let him go free. Then they put a star athlete under the blade, but the same thing happened. Then they brought a Rose-Hulman graduate to the scaffold, and as he put his head beneath the knife he looked upward and said "Wait! I think I see your problem!"
We have passed the time when our best scientific minds can devote themselves solely to their chosen work, or to solving huge, avoidable problems after others have caused them. The issues that now face our country often require a technical understanding, or a grasp of statistics, or cost-benefit analysis, or an appreciation of the scientific method with which the general public is not equipped, and which our politicians neither understand nor particularly want to. People like those Rose-Hulman produces must increasingly challenge not just the design of the guillotine but the policies that would put it there in the first place."

Pretty nice, huh? Finally, he went on a screed about the pseudo-science behind global warming:

A relentless project has inundated Americans for years with the demand that we must drastically reduce the carbon dioxide we emit as a society. It is asserted that the earth is warming; that this warming would have negative rather than positive consequences; that the warming is man-made rather than natural; that radical changes in the American economy can make a material difference in this phenomenon; and that utility bills in Indiana must double because no better, less expensive alternative to this policy is discussable.
Well. All these contentions may be correct. It may be that they will all be borne out over the coming decades. But the average citizen has no way to be sure of that for now. Although there are scientists, and scientific studies, that are deeply skeptical of all these claims, they are rarely heard in what passes for public debate. The debate, so far, has been dominated by "experts" from the University of Hollywood and the P.C. Institute of Technology.
Joining this discussion will require more than technical competence; it will take courage, too. In what has become less a scientific than a theological argument, anyone raising a contrary viewpoint or even a challenging question is often subjected to vicious personal criticism. Any dissident voice is likely to be the target of a fatwa issued by one Alatollah or another of the climate change theocracy, branding the dissenter as a "denier" for refusing to bow down to the "scientific consensus."

Ayatollah Gore. I like it.

Out of the courtroom and into the back room

2009-05-27T08:40:00.006-04:00

I've been reading a little about Obama's Supreme Court pick, Sonia Sotomayor. She's not great, obviously, but she's probably not the worst result we could have gotten from Obama's "empathy" litmus test. Tom Bowden at ARI has a good blog post on why Sotomayor is unfit for the Court because of her opposition to objective judicial interpretation. (Does denial of its existence count as opposition?) Even so, a judge without principles is basically a broken clock, and ends up ruling well now and then due to sheer happenstance.

So, in reading about this woman, I came across a tidbit of information that troubled and saddened me. In the WSJ's article about Sotomayor's ruling history, this paragraph described one case of investor fraud:

In another pro-plaintiff ruling, Judge Sotomayor allowed a shareholder class-action suit against Merrill Lynch that alleged fraud. A unanimous Supreme Court in 2006 overruled Judge Sotomayor's Second Circuit opinion. The high court found that federal law assigned enforcement to the Securities and Exchange Commission, leaving no room for lawsuits under state fraud laws.

Ignoring the fact that legal philosophy has deteriorated in this country to the point that you're either pro-plaintiff or pro-defendent, I want to draw your attention to the Supreme Court's ruling in this case. As free-marketers, we always talk about how, without the SEC, investors could sue their management for fraud. This, and other vehicles of management's rational self-interest, make sure investors' interests are looked after. What we don't mention enough, I think, is that whent the government removes from the marketplace the competitive advantage that is integrity, investors are at the mercy of the SEC to protect their property rights, a charge the SEC also executes with broken-clock precision. For more on this type of issue, read Alan Greenspan's article in Capitalism: The Unknown Ideal called "The Assault on Integrity". (Greenspan's apostasy notwithstanding)

As in my previous post on regulation, in general, I stress that regulatory bodies like the SEC remove strategic advantages from firms, and drown all interested parties in a sea of mediocrity and subjective selection.

Successful Succession at Xerox

2009-05-22T18:42:00.002-04:00

Xerox CEO Anne Mulcahy is stepping down in July, but will remain on as Chairman. Her hand-picked successor, Ursula Burns, Xerox's current president, will lead the company. Incidentally, she will become the first black woman to lead a Fortune 500 company.

Mulcahy was an excellent CEO by almost any standard. She took over the company when it was on the verge of bankruptcy and mired in an accounting scandal. She downsized, reducing the workforce by over 20,000 people. She led the firm in a new direction, making it more competitive in a world where copiers are becoming obsolete. The market capitalization of Xerox today is not far above what it was when she took the company over in 2001, however that can mostly be attributed to the market downturn. It is not far-fetched to suggets Xerox might not even have much of a market cap today if it were not for Mulcahy.

Mulcahy has been grooming Burns for this job, and the succession process looks to be almost seemless. It will be interesting to see how Burns leads the firm through its latest trials and tribulations. Here is an article on Mulcahy and Burns, and here is one on the "model" succession process.

More on CEO Pay

2009-05-20T07:29:00.002-04:00

On ARI's blog, Voices for Reason, Don Watkins has a nice post about CEO pay, and how it is a challenging thing to get right, even in a free market. As he writes:

It requires a tremendous amount of thought and judgment. What should be the mix between base salary and incentive pay? What kinds of incentive should be offered–stock options, restricted stock options, stock appreciation rights? How should those incentives be structured–over what time frame and using which metrics? And what about a severance plan? What kind of plan will be necessary to attract the best candidate? And on and on. The mere fact some people make their living as executive-pay consultants illustrates how challenging the task is.

Now, it is sometimes difficult to determine what exists because of its competitive advantage, and what exists to comply with or avoid regulation. (Topic for a study, maybe?) Nevertheless, I think viewing CEO pay as a source of competitive advantage, rather than as merely an administrative, HR-ish issue, has interpretive benefits. It allows us to see that what the Obamanons, and the Bushies before them, are doing is waging all-out war on success. This goes way beyond the tax code. With regulation, you don't just take away the products of success, you force people to all do the same thing, thus ensuring that success in that area is impossible. This helps those firms who would never stay competitive on their own, and hurts those firms who innovate and create.

Put into CEO pay language, being able to appropriately pay an executive for his or her successful effort is a major strategic issue for companies (it better be, otherwise I'd need to switch majors). This is mainly because almost no one has any idea how to do it. Regulating CEO pay takes away any strategic elements, and "levels the playing field," so to speak.

"And the trees are all made equal
by hatchet, axe, and saw."

(Allow me one Rush reference every now and then.)

He's Real and He's Tall

2009-05-15T12:28:00.002-04:00

Yesterday, I had the opportunity to bask in the golden glow of capitalist He-Man John Alison. He was speaking at the Chicago Club, in an event hosted by FreedomWorks (Dick Armey's organization) and The Heartland Institute, where I interned last summer. Alison was speaking on the causes of the financial crisis, and gave a presentation almost identical to the one I linked to on this blog that he did back in January in D.C. Still, it was fun to see him talk in person.

It is also worth mentioning that BB&T, the bank which Alison led for over twenty years, has applied to pay back its TARP money, money they were forced to take in the first place. They have to raise new capital to do so, unfortunately, and that requires raising new equity, as well as temporarily cutting their dividend. This was especially difficult for them, because they pride themselves on not having cut their dividend in thirty-some-odd years. Now-CEO Kelly King made an excellent justification in his letter to shareholders, though, in which he stated that even though they hate to do it, the interests of shareholders are better served by getting out from under His Majesty's TARP thumb than by keeping the dividend high this quarter.

It is far too rare in business that leaders embrace uncomfortable reality head-on, and do what's best for shareholders in the long-run. The leadership of BB&T deserves much praise and respect.

Published

2009-05-14T14:03:00.002-04:00

It's official, I am now a published scholar. The Michigan Journal of Business, the only major undergraduate academic business journal to my knowledge, has published my paper on executive long-term compensation in its latest issue. Here's the link for the journal and for my paper. In my paper, I found that in a sample from the fifty largest U.S. banks, "long-term" compensation had no effect on either of two metrics of long-term thinking.

This is especially pertinent, if I do say so myself, because His Majesty has lately been talking about issuing new royal decrees governing compensation of all bank executives of the realm, TARP-receiving or not. Here's an article on the subject. A nice excerpt:

Few companies that would be affected by a federal crackdown on compensation would publicly discuss the options being considered by administration and regulatory officials, which include trying to more closely match pay with long-term performance. The wait-and-see response also reflects nervousness about openly challenging the Obama administration on an issue that has become a flashpoint for anger over Wall Street's culpability for the financial crisis and recession.

That's nice, Barack. What I love about this whole charade, other than the blatant violation of individual rights, of course, is that, as I show in my paper, that "long-term" compensation crap is bullshit. Throwing stock options at someone does not a long-term incentive make. This is just more of His Highness' Royal Circus.

So yeah, go me.

No More Drunk Driving at Anheuser-Busch

2009-05-03T09:38:00.002-04:00

I don't drink Budweiser (because I'm an elitist snob who likes "craft" beer), but I have friends who do, and so I have a bit of an interest in the progress at Anheuser- Busch. Some of you may remember that several months ago Belgian brewer InBev approached A-B several times offering a merger, only to be turned away several times, and threatened with defensive tactics, such as buying dead-weight companies to scare InBev off (That would have been stellar strategy.) In the end, A-B's board couldn't say no to their European wooers, and caved, much to the chagrin of jingoistic Amer'can protectionists everywhere (mostly in St. Louis).

At the time, many wondered (myself included) how InBev could justify spending $52 billion on a giant, low-growth company. Well, now we know, and it looks like this deal might have been a stroke of genius.

In the business world, we always like to talk about synergies when discussing mergers. According to this WSJ piece on the merger's progression, there were no synergies with A-B. InBev intended to make them.

Since taking over the company, InBev has been attempting to change the culture at A-B from that of an extravagant, perk-pumping employment mill to that of a lean, mean, profit-generating machine. Consider just these changes:

After InBev swooped in last fall with a $52 billion takeover, it sacked about 1,400 employees in the U.S., equal to 6% of the U.S. work force before the merger, and 415 contractor positions. These followed 1,000 employee buyouts accepted at Anheuser-Busch just before the merger.

InBev has overhauled the U.S. division's compensation system for salaried employees, as part of what an internal memo called "an increased focus on meritocracy." In the future, the company will pay salaried workers 80% to 100% of the market rate for comparable jobs, "and any increases above that require special justification and approvals," said the memo. That changed a system in which "high performers...might have seen fewer rewards as dollars were spread more evenly."

Dollars do not spread well. The compensation system is just one change, but I think it is one of the most important, as it lines up incentives when done properly. This can remove the need for a lot of other expensive measures down the road. This little detail is great:

Anheuser-Busch InBev in November gave a total of 28 million stock options to about 40 executives companywide, as an incentive to combine InBev and Anheuser-Busch successfully and lower corporate debt. The executives will be able to cash in the options, potentially worth tens of millions of dollars to each recipient, if the company reduces its debt-to-income ratio by about half in five years.

Meanwhile, the company will halt contributions to its pension plan for salaried employees in 2012. And in January, it will stop providing retiree life insurance.

Stock options are really tricky things, and are usually done wrong, but this idea seems really interesting. Normally stock options are pretty worthless as an incentive because most employees have very little influence on stock price, and thus on whether their options will make money. This vesting criteria of halving debt/income, on the other hand, sets a clear objective that every employee can help affect, through both raising revenue and cutting costs/borrowing.

And providing retiree life insurance is just dumb. Good going InBev. However, your beer still sucks. Work on that.

Croaking Class of Persons

2009-04-29T23:23:00.003-04:00

Every now and then I read a quote that makes me want to shout out "Yes, that's exactly what I want to say, and damn does it sound good!" I've been reading historian Burton Folsom's book Entrepreneurs vs. The State (With a title like that, you know it's good. I think it's out of print now, but I think his The Myth of the Robber Barons is very similar if not the same). It's a very entertaining and enlightening read, and I recommend it if you get the chance.

Anyway, he has a chapter devoted to the founders of Scranton, PA. They were the Scranton brothers and their associates, who started the Lackawanna Iron and Coal Company as well as the Delaware, Lackawanna, and Western Railroad. Some of these men were great capitalists who amassed a fortune, as well as built and planned the city of Scranton.

In this chapter, Folsom discusses how the local farmers were not too keen on these city boys buying nearby land and building factories on it (although they did not complain about the easy freight access). They did not want "the 'machine' [to] transform their 'garden' into an industrial community." It's easy to see that these farmers were anti-capitalist Luddites of the oldest and most enduring breed. Folsom then presents the reader with a quote from a Lackawanna Valley historian, Horace Hollister, describing the farmers. No description would do justice to this quote, so just read:

There were then, as there are yet, and as there always will be, a debilitated, but croaking class of persons who by some hidden process manage to keep up a little animation in their useless bodies, who gathered in bar-room corners, and who, with peculiar wisdom belonging to this class while discussing weighty matters, gravely predicted that "the Scrantons must fail!"

Substitute "capitalism" for "the Scrantons" and you've got a description of every whiny, lazy, self-hating moocher now crowing for government to lead them and tell them what to do. "Croaking class of persons;" I love it!

To Clarify My Point

2009-04-29T11:05:00.002-04:00

I feel I should respond to Kendall's comment on my previous post, because he makes a few excellent points. Yes, the government's new and expanded ownership of GM and Chrysler is a very bad thing, existentially speaking. The Obamanons will have no problem lavishing favors on their new territories, attempting to stifle any competition from Ford (unless it, too, starts hurtin' for some gov'ment lovin') as well as all the foreign producers. Americans may be left with no financially sound choice but to purchase environmentally friendly, unoffensive, unsafe, Yugo-esque government-issue wagons.

When I stated that I thought this development was a good thing, I meant that in a more PR-ish way. I prefer the open tyranny of socialist ownership of business to the silent tyranny that has been running rampant. The secret blackmailing of bank executives, followed by the public excoriation of said executives for doing exactly what they were forced to do. The public "aid" for auto manufacturers accompanied by increased fuel-efficiency regulations, which I'm sure help with that cash flow problem. Maybe my optimism about the open federal ownership of these companies is simply due to my weariness from the underhanded backroom dealings that have become governance-as-usual.

Right now I'm optimistic that out-and-out socialist government ownership of GM and Chrysler can shock people into opposition. When I have no option but to drive a tin can on wheels that can only run on corn juice, I will probably lose said optimism.

Thanks for the comment, Kendall. And, of course, Boilermakers are always welcome on this site, even thought IU is better.

20th Century Motor Company, Anyone?

2009-04-28T21:17:00.004-04:00

Okay, so today, GM announced its plan for how it's going to emerge from its current dilemma. Here is what the brains trust has produced:

Under the plan, GM is asking the Treasury Department for an additional $11.6 billion in loans, on top of the $15.4 billion it has already received. It envisions giving the government at least half ownership of the company as payment for half of the loans.

At the same time, GM said it would use stock instead of cash to pay off half the $20.4 billion it owes a United Auto Workers fund to cover retiree health care. That stock would leave the union owning about 39% of GM.

Um...what? So, if the Obamanoms own over half of the company (making it a government agency, right?) and the union owns 39%, what exactly is GM? Apparently 11% is left for whatever brain-dead shareholders want to go along for Mr. Car Czar's Wild Ride.

Believe it or not, I see this development as a good thing. GM abandoned maximizing shareholder value (the only valid purpose of a firm) as its guiding purpose long ago, in favor of a "stakeholder" position. This was not the shareholders' fault, really. The government has forced GM to comply with almost as many regulations as the financial industry must contend with. And labor makes sure that what little money GM makes from cars goes directly to them. This new arrangement simply makes explicit what has been the case for years.

In the same vein, Chrysler has now agreed to cede a majority share to the UAW, with big Gov taking a 10% stake. So, basically, the inmates are running the asylum. May U.S.G.M. and U.S. Chrysler get exactly what they've bought, I say.

As a side note, Ron Gettelfinger, the UAW's chief executive, is a graduate of the Indiana University School of Business. Thus, I'm sure he'll be more than capable of guiding these firms to success. Right? I guess it could be worse. He could be from Purdue.

What I want to know is, if the union is going to own Chrysler, and the government owns GM, who will the workers threaten to strike against?

Consult Your Regulator to See if Twitter is Right for You!

2009-04-27T10:32:00.002-04:00

In yet another example of how regulators exert unfathomable control on business, this WSJ article describes how corporations are wary of disseminating information to investors via Twitter and blogs, lest they incur the wrath of the SEC. Here's a quote:

But even some tech-savvy companies remain wary. Intel Corp. in May will be among the first companies to allow shareholders to ask questions via the Web and vote online during its annual meeting. But the chip maker avoids blogs and Twitter for investor issues, because it fears violating SEC disclosure rules or inviting public criticism in a company-hosted forum, says Kevin Sellers, vice president of investor relations.

The second concern is valid, although I think Intel would get over it. The fact that disclosing more, and more easily accessible, information would violate SEC disclosure rules boggles the mind. This shows the pointlessness, in addition to the more obvious violation of individual rights, inherent in corporate regulation. Regulations are statutory, they are static, while the business world is dynamic and ever-changing. Companies should not have to ask the SEC's permission every time they want to improve service to their shareholders.

For another example of regulatory abuse, see the ongoing saga regarding how Paulson and Bernanke forced Ken Lewis to betray Bank of America's shareholders "for the good of the country." (To be blogged on once more details have trickled in.)

Time for a Morale Booser...Asian Style

2009-04-23T18:25:00.002-04:00

Last week's Economist had a nice little feature on Yuzaburo Mogi, the leader of Kikkoman. You know, the soy sauce people. I had never heard of this gentleman before, but apparently his family was one of the founding families of the company, which "traces its origins to the early 17th century." I'm a sucker for some good soy sauce, so this story's got some special meaning for me. Regardless, it's a great business article all-around.

Mr. Mogi, apparently, is not afraid to break with tradition when it comes to growing his firm. In the fifties, Kikkoman marketed their sauce as an "all-purpose seasoning" so as to attract June Cleaver and her friends. They introduced terriyaki sauce in the U.S., designed for U.S. consumers as a barbecue glaze (I had no idea), and are now eyeing South American tastes, "such as a soy sauce that can be sprinkled on rice--something that is not done in Japan." They're also trying to sell soy sauce in China (which seems like selling cheese in Wisconsin). In the land of cheap knock-offs, Mogi is planning to sell his usually mainstream product as a premium brand.

Read the article. It'll make you feel good about the world for a few minutes.

His Royal Barackness, King of Corporations

2009-04-22T17:43:00.002-04:00

Holman Jenkins writes the "Business World" column for the WSJ, and he always has some pretty humorous and generally useful insights. Today's column pokes fun at the fact that Barack is acting like a monarch, and discusses the debacle of GM in this context. The article is worth reading for its descriptions of the various ways Barack is ensuring GM's abject failue under the guise of helping it along. But I particularly enjoyed the jabs at His Majesty. Like this picture:

wsj.com

I also enjoyed this paragraph:

King Barack could take a leaf from St. Jimmy the Simple, who faced a collapse of the railroad industry. He signed the Staggers deregulation law, returning power to the industry itself to decide what services to provide and which customers to chase. What had previously been an industrial basket case, halfway nationalized already, fixed itself almost overnight.

That would be Jimmy Carter, in case you didn't know.

Financial Innovators

2009-04-22T14:48:00.002-04:00

Gordon Crovitz had a decent column on financial innovators in the WSJ on Monday. He compares financial innovators to other, more physical innovators, who have provided incalculable value to civilization. I particularly like this passage:

The innovators who thought up the elevator, the cotton gin and space travel didn't intend to kill or injure people as they perfected the technologies. Likewise, today's financial engineers never imagined their miscalculations could result in a global recession.

Now, as any thinking person understands, their miscalculations resulted in a global recession because they assumed a normal level of risk in the system, as opposed to a government-subsidized, fucktardedly high level of risk. Regardless, the appreciation for innovators is welcome. Crovitz discusses how sometimes failure is necessary to learn how to do something right. A good lesson, and I think there's a Thomas Edison quote to that effect that I'm sure I've mentioned before.

On the other hand, Crovitz goes on to quote Robert Murton, a famous Harvard economist who's screwed up quite a few times. He produced this gem back in '94: "any virtue can become a vice if taken to extreme, and just so with the application of mathematical models in finance practice."

No, Bob, if your virtue becomes a vice when taken to extreme, YOU'RE DOING IT WRONG! Still, the article is worth a read.

Accounting Bitch #3

2009-04-15T22:56:00.002-04:00

Here's an aggravating link from my good friend Billy over at UT Austin. The article discusses Goldman Sachs' change of their calendar, a move that just happens to leave the disastrous month of December as a footnote in their financial statements, enabling them to show quasi-healthy profits this quarter.

What's aggravating is the sheer meaninglessness of corporate financial reporting. As I've said before, the best option for an investor is to look at cash. Look at the cash a firm generates. Poor cash management is what typically brings down corporations, and the current myriad accounting rules only serve to hide poor cash management. On the other hand, the rules can also mask a good cash position, such as in the case of mark-to-market, where banks were forced to write down assets to ridiculously low levels, even though those assets were still generating cash.

Look to cash. Always look to cash.

How Absolute Power Is Obtained Today

2009-04-13T11:47:00.003-04:00

I would like to comment briefly on what I see as the new form of power grab that the Obama administration has begun to employ. It used to be that the government caused some problem by distorting markets, blamed the non-existent free market for those problems, and grabbed even more power as a result. This method has worked very well for them over the years.

Now, however, Obama is employing a new, quasi-European form of power grab. I find it interesting, because they are abusing people's respect for an old and valid principle in order to destroy that same principle. (Rand said something about undermining the meaning of concepts, didn't she?)

What I am referring to is the involuntary infusion of capital into private firms, the imposition of rules and oversight on the basis that the government is a legitimate stakeholder, and finally the refusal to accept the money back. People respect the government's increased role because they see the infusion of capital as a legitimate claim. The refusal of repayment, as well as the involuntary nature of the loans in the first place, destroy this concept, but naturally they are all done very secretly.

It should be clear to anyone who knows the facts that the purpose of this facade is to grant Obama and his cohort absolute control over the actions of individual banks and auto firms, as well as whatever other poor companies have the misfortune of catching the King's eye.

You're Damn Right "Survival of the Fittest"

2009-04-08T11:28:00.004-04:00

Okay, that last post was depressing, so how about something positive? On the front page of today's WSJ, I spotted this feature. It tells a heart-warming tale of a well-run business taking advantage of other firms' shortcomings in an economic downturn, seizing opportunity wherever it appears, even if the article's author sounds like he would have supported the "Anti-Dog-Eat-Dog Rule." It starts like this:

Roy Calcagne offers a simple explanation for why, in the midst of a grueling downturn, his company is selling more sofas and love seats than before."
We're stealing market share," says the chief executive of Craftmaster Furniture Inc., a maker of upholstered pieces with two large factories here.

Huh, imagine that. While I hardly think Mr. Calcagne really thinks of his firm's actions as theft, the article's author seems to take those words to heart. The tone of the piece implies that existing firms have a right to their market share, and that there's something unwholesome about Craftmaster's attempts to unseat their larger rivals, like they should be gracious in their limited success.

Nevertheless, this is still a story to provide some more intellectual ammunition for those of us who respect business as value creation, and want to know that that practice still exists in this country.

You Want I Should Exchange Our Convertible Bonds for Equity, Boss?

2009-04-08T11:13:00.004-04:00

Sorry I've been so intermittent with the posts lately, I've been extremely busy. Here's a couple of posts to catch us all up on what's happening in business.

First, I saw this on the cover of the WSJ yesterday, and I honestly felt a chill down my spine. It's a feature article about the TARP's "chief investment officer." Before getting into philosophical analysis of the situation, just look at the guy! He looks like one of Jack Nicholson's low-level enforcers from The Departed. To make it worse, although any moderately rational individual could have seen this coming, he acts like it too:

Tall, bald and blunt, Mr. Lambright has gained a reputation within the government for his tough negotiating style, which at times has irked those seeking aid and ruffled the feathers of some colleagues. Some have criticized Mr. Lambright for demanding too many concessions, including restrictions on executive compensation. Some of his own colleagues have urged him to cool his rhetoric.
"He's unbelievably tough, and sometimes needs to be reminded that the job is to save the financial system," says former Treasury Secretary Henry Paulson, who hired Mr. Lambright at the Treasury.

Paulson thinks he's tough! This Stanford thug makes Paulson look like Mr. Clean. Ladies and Gentleman, I give you the new power center of our economy: a smart, well-dressed version of an underworld hit man. Well, we knew it would happen some day.

Drucker

2009-04-04T17:47:00.002-04:00

Today's Profile in Contradiction comes to you from the foremost guru of management, Peter Drucker. Since I'm going to be joining the ranks of the management academe, I felt I should educate myself as to the musings of the great Drucker. And so, perusing his Concept of the Corporation, I came across this excerpt:

Though we have largely abandoned it in legal and political practice, the old crude fiction still lingers on which regards the corporation as nothing but the sum of the property rights of the individual shareholders. Thus, for instance, the president of a company will report to the shareholders on the state of "their" company. In this conventional formula the corporation is seen as transitory and as existing only by virtue of a legal fiction while the shareholder is regarded as permanent and actual. In the social reality of today, however, shareholders are but one of several groups of people who stand in a special relationship to the corporation. The corporation is permanent, the shareholder is transitory. It might even be said without much exaggeration that the corporation is really socially and politically a priori whereas the shareholder's position is derivative and exists only in contemplation of law.

He doesn't ever really say what makes the shareholder view "crude," but then who ever does? This "stakeholder" theory of business is old news today, and is typically paid lip service in any business ethics context. Thankfully, most of business academia is still focused on maximizing shareholder value. Which is good, because how exactly does a business exist without owners? Providing capital and getting return on investment is an indispensable element of capitalism.

Now, Drucker's not perfect, but he understands a few basic points. For one thing, he isn't exactly a stakeholder theorist in the way many closet Marxists are. He's more of a corporation theorist, basically holding that the corporation is an end in itself and all effort should be directed toward the betterment of the firm. (Incidentally, one wonders what this means if not maximizing shareholder value.) So, I feel I should present a more present quote of his from the preceding page:

Survival as an organization is the first law of the corporation as of any institution; and ability to performs its own purpose, to produce goods with the maximum economic return, is its first yardstick of achievement.

Sounds like maximizing shareholder value to me, but hell, what do I know?

Where was this the last eight years?

2009-04-01T11:14:00.003-04:00

Congressman Paul Ryan from Wisconsin had an op-ed in the WSJ today outlining the Republicans' alternative budget for this year. Ryan's a good egg, a very small-government Republican, not perfect but a saint by Congressional standards. He is now the ranking Republican on the House Budget Committee, a position long overdue him. I'd like to see him try to run for President.

Anyway, most of the alternative budget is garbage just like Obama's budget, and keeps spending pretty constant, but there is a nice little component on tax reform:

- Tax Reform. Our budget does not raise taxes, and makes permanent the 2001 and 2003 tax laws. In fact, we cut taxes and reform the tax system. Individuals can choose to pay their federal taxes under the existing code, or move to a highly simplified system that fits on a post card, with few deductions and two rates. Specifically, couples pay 10% on their first $100,000 in income (singles on $50,000) and 25% above that. Capital gains and dividends are taxed at 15%, and the death tax is repealed. The proposal includes generous standard and personal exemptions such that a family of four earning $39,000 would not pay tax on that amount. In an effort to revive peoples' lost savings, and to create an incentive for risk-taking and investment, the budget repeals the capital gains tax through 2010 for all taxpayers.

On the business side, the budget permanently cuts the uncompetitive corporate income tax rate -- currently the second highest in the industrialized world -- to 25%. This puts American companies in a better position to lead in the global economy, promotes jobs here at home, and strengthens worker paychecks.

My, that sounds nice. Too bad Republicans these days are about as powerful as a solar-powered night light. Where the hell was this budget when you guys ran the show? Two-tiered flat tax? (Well, it's flatter than the current system) 25% corporate rate? Repealed capital gains tax? (True, only for a year, but hey, it's a start) Republicans make me sick. They only get principled when the know none of this shit will get passed.

Proposing a budget like this now when they had eight years to easily slide it through Congress is a welcome change, but it is really disingenuous considering it has -500% chance of beating Obama's budget. "A" for effort, though, boys.

The Big Engine That Couldn't

2009-03-30T11:30:00.002-04:00

Hi all. Sorry I haven't posted in a few days. I've got three exams this week, and I need to revise a paper for publication by Friday (More on that later). Today I am discussing Rick Wagoner, who last night was fired by Barack Obama from his job as Chairman and CEO of General Motors. Yes, the President asked for his resignation, and he granted it. Someone please tell me why we even have business anymore? Here's the article: demise of a douchebag.

I wish I could feel an ounce of sympathy for Wagoner, but I can't. He asked for this fate. He managed a company for eight years on the principle that profitability is a relative term (only economists actually believe that). When cash ran thin this year, he and his Detroit buddies went crawling to Mommy to bail them out. And because GM is Amer'can, whatever that means these days, it got the money. Shockingly, the money ran out, and they needed more money. Finally, the government had had enough of GM's incompetence, and last night they ousted the captain and replaced him with the first mate of the GM Titanic, the current COO. I'm sure it'll be roses and gumdrops from here on.

And sure enough, with optimism rivaling Stalin, the administration announced that it is "prepared to stand by GM throughout this process to ensure that GM emerges with a fresh start and a promising future."

We all know the political lessons to glean from this scenario, but I think the less obvious lesson is the business one that really drove the nail into GM's coffin. Other than the political pandering, the environmentalist bullshit, the labor appeasement and pacification, the financing shenanigans, the shitty, unprincipled management, and the all-around bad karma, what finally killed GM was poor cash flow management.

Lots of companies rely on short-term borrowing to fill holes in their cash inflow, so that they can meet their expenses. GM, however, tried to ride that debt horse into the credit crisis, and we know how well that turned out. Generating cash from sales is crucial for navigating rough waters like we face today, especially when you face the galactic labor costs GM does. In the auto industry, it's difficult to keep cash coming in reliably from sales, but maybe, then, a smaller, leaner auto manufacturer might be a preferable business model to the stumbling golem model we enjoy today.

Just a thought.

The Only Friendly Skies

2009-03-25T11:34:00.003-04:00

Finally, I have found some good news in the business world to report. Amidst the game of Jenga that is the U.S. economy, it's nice to see that Southwest Airlines is still doing pretty well. Gary Kelly, CEO since 2004, is interviewed in this article and seems to have a pretty fair strategic outlook. A few encouraging remarks:

The airline's chief executive is adding flights to heavily trafficked domestic airports and seeking cross-border alliances with foreign carriers. He's also considering adding on-board Internet surfing and more-extensive wine and coffee service.
But Mr. Kelly says adding full-scale meals remains off the table. And Southwest, the largest U.S. discount carrier by revenue, remains steadfast against charging customers for checking in suitcases and using pillows, as rivals have done.
"Adding fees is not the way to grow the airline," Mr. Kelly says in an interview at the company's headquarters here. "Customers hate that stuff."

Oh, you noticed that, huh?

Last week, true to discount roots dating to 1971, Southwest launched a summer fare sale on domestic flights, with one-way prices as low as $49. As in the past, major competitors were forced to follow suit.
By keeping costs low with simple operations, Southwest has booked 36 straight years of profit and flies more passengers within the U.S. than anyone else. Southwest is the only major U.S. airline to enjoy an investment-grade credit rating.

What I love about Southwest is that they succeed repeatedly by responding to market reality, while their competitors repeatedly fail and run to either bankruptcy court or worse, the government. They foresaw the spike in oil prices last year, and hedged against them (of course, that same hedge hurt them when oil prices plummeted in the fall.)

Basically, it's just nice to see successful firms come out of what is a mind-bogglingly success-starved industry.

And Now for Something Completely Different

2009-03-23T11:42:00.002-04:00

I've been harping on about a lot of big ticket issues: bailouts, bonuses and such. So, when I noticed a much smaller atrocity on the front page of the WSJ today, I thought I should bring it to your attention. Basically, a small businessman is attempting to get an Asian skin treatment technique to catch on in the U.S. He uses fish to defoliate people's feet. At first it sounds kind of gross, but read the article. It's not so bad. The guy bought these little dead-skin-eating fish about the size of sardines, and he constructed individual plexiglass foot baths to keep them in. And the idea is starting to spread. So, naturally, this happens:

Until Mr. Ho brought his skin-eating fish here from China last year, no salon in the U.S. had been publicly known to employ a live animal in the exfoliation of feet. The novelty factor was such that Mr. Ho became a minor celebrity. On "Good Morning America" in July, Diane Sawyer placed her feet in a tank supplied by Mr. Ho and compared the fish nibbles to "tiny little delicate kisses."
Since then, cosmetology regulators have taken a less flattering view,insisting fish pedicures are unsanitary. At least 14 states, including Texas and Florida, have outlawed them. Virginia doesn't see a problem. Ohio permitted fish pedicures after a review, and other states haven't yet made up their minds. The world of foot care, meanwhile, has been plunged into a piscine uproar. Salon owners who bought fish and tanks before the bans were imposed in their states are fuming.
The issue: cosmetology regulations generally mandate that tools need to be discarded or sanitized after each use. But epidermis-eating fish are too expensive to throw away. "And there's no way to sanitize them unless you bake them for 20 minutes at 350 degrees," says Lynda Elliott, an official with the New Hampshire Board of Barbering, Cosmetology and Esthetics. The board outlawed fish pedicures in November.

I think the concept of "cosmetology regulators" pretty much sums up the absurdity of this whole scenario. Granted, Ho's original plan to keep the fish in a communal bath that people would use simultaneously sounds pretty unsanitary, but I'm guessing customer sentiment would have led him to create the individual washable tanks pretty quickly if regulators hadn't forced him. Just another example of a promising business model being trodden over by peabrained regulator thugs.

Ho, I salute you!

Book Recommendation

2009-03-19T22:05:00.002-04:00

I just finished reading P.J. O'Rourke's Eat the Rich, and I really enjoyed it. It's a humorous introduction to economics, complete with scenes from countries at all corners of the economic landscape. He discusses what makes Wall Street different from Albania (please, hold your snide jokes until the end), Sweden from Cuba, Hong Kong from Tanzania (You've heard of Hong Kong). O'Rourke's a free-market guy with a likeable cosmopolitan wit. And he hates the Clintons, to boot. Here's a couple of my favorite exerpts.

A belief in the free market means a belief that people have an innate right to the fruits of their endeavors, and the right to dispose of the fruit the way they see fit, as long as other people don't get pasted in the face with a rotten peach or something.

Accepting the free market allows us to avoid the political abuse and financial mismanagment inherent in trying to design an economy that's fair. It also allows us to see that economies can't be designed. Economics is the measurement of how human nature affects the material world. The market is "heartless." So are clocks and yardsticks. Saying that economic problems are the result of the free market's failure is like gaining twenty pounds and calling the bathroom scale a bum.

There's a bunch more comments like these throughout the book, but I won't spoil it for you. Go out and buy it! (Incidentally, I got my copy for a dollar at a library book sale. Being poor is fun.)

What Moral Hazard? This Is News to Us.

2009-03-17T17:25:00.002-04:00

AIG is a fantastic example of how good the government is at running corporations. The government owns 80% of inflated insurance giant AIG, a greater level of ownership than most institutional investors own in anything. As such, it has a genuine interest in seeing the firm turn profitable, right?

Oh yeah, Barney Frank doesn't care what happens to taxpayers' investments since...that tax money keeps rolling in no matter how well AIG performs. Okay, so under that paradigm, it makes sense that the government's management style consists of forking over an ass load of money, and then running in the other direction to worry about something more important, like hand out even more money, but to people who vote.

This reminds me of Alan Greenspan saying "I am so surprised that the self-interest of banks did not restrain them from taking excessive risks," when he spent half a decade telling banks "Free Risk! Free Risk! Come take my risk! Hey Nonny Nonny Hey!. What Alan Greenspan did to the markets was force feed it steroids and then say "Oh my, how did those testicles shrink like that?"

And this is basically what has been done with AIG. If Barney Frank could speak human, his words would say "We gave them tons of money for driving a once-great company into the ground, and now they've spent some of that money on bonuses. How could this have happened?"

Happy St. Patty's everyone. I need a drink.

Tax Bitch #1

2009-03-16T12:41:00.003-04:00

Apparently I'm a rich college student, because I owe Barack Obama $400 this year! Most of this is due to a couple scholarships I received which counted as "Other Income" and "Self-Employment Income" (Don't ask, I don't know how that works, either).

In the course of attempting to find ways to escape his Highness' tax collectors, my Dad and I came across a few delightful nuggets of information you might not have known about the tax system in this country.

For instance, if your child has been kidnapped, the residency requirement for child exemptions will be waived, and you can still consider that child a dependent. Phew! I guess it's good you aren't taxed for having your kid snatched.

Also, you can take the child exemption for any child born alive, even if that child dies soon after birth. You cannot, however, take the exemption for stillborn children. Thanks for plugging up that loophole, boys. I can just see a bunch of rich bastards knocking up their wives and then whacking them in the gut with 2x4s just for the tax savings.

Finally, and I am sure I will expand on this much in the future, double taxation of dividends is one of the most evil components of the tax system, not only for its distortion of reality, but also for the perverse incentives it establishes for corporate management. Terrible.

Rand in the Journal

2009-03-15T01:50:00.003-04:00

Dr. Yaron Brook, President and Executive Director of the Ayn Rand Institute had an op-ed printed in the WSJ today. Here's the link. It's a very good, very concise explanation of why Rand has become so popular recently, and what her major contributions are to the national discourse. I think Brook really gets it, more than his intellectual predecessors, that pushing an ethics of rational self-interest in the context of the current crisis is the way to go. As opposed to getting up in front of a group and talking about Objectivism as a whole, talk to businesspeople and related audiences about what they know: their own interests. Then, when they're ripe, you can talk about metaphysics and the rest.

Go me!

2009-03-11T19:02:00.002-04:00

Some events may have happened in business today; I don't really know. Alan Greenspan wrote an atrocious op-ed in the WSJ in which he attempts to absolve himself of his meddling role in the credit crisis. I think Freddie Mac lost an unconscionable amount of money...again.

All of that pales in comparison, of course, compared to the most important thing that happened to the business community today: I was accepted to the PhD program at the Kelley School of Business to study Strategic Management. I know, I know. I'm awesome. One day this momentous occasion will be recorded in the history books.

That's all. Go celebrate in my honor, now.

Could Not Have Said It Better Myself

2009-03-10T20:01:00.002-04:00

The WSJ had a great quote in its "Notable and Quotable" section today. It is from The Times of London from 1846. What I want to know is, why don't newspapers write like this anymore?

The greatest tyranny has the smallest beginnings. From precedents overlooked, from remonstrances despised, from grievances treated with ridicule, from powerless men oppressed with impunity, and overbearing men tolerated with complaisance, springs the tyrannical usage which generations of wise and good men may hereafter perceive and lament and resist in vain.

At present, common minds no more see a crushing tyranny in a trivial unfairness or a ludicrous indignity, than the eye uninformed by reason can discern the oak in the acorn, or the utter desolation of winter in the first autumnal fall. Hence the necessity of denouncing with unwearied and even troublesome perseverance a single act of oppression. Let it alone, and it stands on record. The country has allowed it, and when it is at last provoked to a late indignation it finds itself gagged with the record of its own ill compliance.

Yep, I think that about sums it up. See, London was cool once.

Barney Frank, VP of Marketing

2009-03-08T19:36:00.004-04:00

In another development that reminds me just how much I would like to see certain politicians disemboweled, their entrails used as hippopotamus dental floss, Congressman Barney Frank (pictured below), Chairman of the House Financial Services Committee, has been getting his man-panties in a twist over banks sponsoring sporting events. His Rotundity, Duke of Fathead, feels that banks receiving (a.k.a. forced to receive) TARP funds should not be "lavishly" entertaining clients with expensive golf sponsorships.

Well, apparently, after a phone call (a.k.a. campaign contribution) from the Commissioner of the PGA Tour, Barney Frank has softened his stance on the sponsorships, while remaining "skeptical" of their benefit. Anyone who might have thought the capital injection was necessary to unfreeze credit markets should plainly be able to see at this point that the medicine is far worse than the disease. Congressman of the worst breed are acting as marketing directors for banks, deciding which advertising expenditures are justified.

The bright spot in all this is that, one by one, banks are seeing the endgame, and are rushing to pay back the TARP money, eager to get out from under Barney Frank's thumb. As the article states, after a stern letter from Barney, Northern Trust announced they would return the $1.5 billion they received from the government, which they did not need or want in the first place. Good for them. I hope BB&T follows suit.

If you want to see where our government is headed in terms of its involvement in business, I think this quote from the esteemed Congressman says it all:

I'm not ruling out sponsorship, especially since tournaments support charities. But the entertainment aspect is problematic.

I cannot express how deeply I want to see a galactic bikini-clad Carrie Fisher strangle him to death with a metal chain during a Congressional hearing. God, that would be cathartic.

Prediction Markets and the Wisdom of Crowds

2009-03-04T17:12:00.002-05:00

Here's an article in the Economist that caught my eye (I recently subscribed to the Economist, does it show?) It caught my eye because it mentions Koch Industries, the founder of which funded the Charles G. Koch summer fellowship that I participated in last summer. Koch Industries is a fascinating company, and their CEO is a big fan of Austrian economics and free markets. One day I'll probably write a post on him and his company.

Anyway, true to form, Koch Industries has apparently been using prediction markets within their company for a few months to determine the course of various outcomes, from commodity prices to bailouts. Prediction markets, for those who don't know, are markets one sets up in which people buy shares in a particular outcome. As an outcome becomes more popular (people think it is more likely) the price goes up. Koch, as well as some other firms, have been using these internal prediction markets to forecast.

I find the idea of prediction markets really interesting. On the one hand, few of these people have any considerable knowledge of the subject in question. On the other hand, the law of large numbers suggests that if you pool enough people, you'll get something resembling the right answer. Koch says it has been working pretty well. I think something like commodity prices would require at least some area of expertise, but assuming that, I think running a prediction market can be a really effective way to create incentives for accurate forecasting.

I Can't Decide How I Feel About This Quote

2009-03-02T11:00:00.003-05:00

I ran across this beauty while reluctantly reading my management text:

The things that make a good leader are being open-minded, having a willingness to really ask for and accept advice, showing a sense of humility, and putting the right people in the right seats. -Hank Paulson, CEO, Goldman Sachs (Prior to his stint as Treasury Secretary)

I'm not really sure what to think about this. Either he followed his own advice and failed anyway, which is funny, or he ignored his own advice and failed, which is funny too. All we can be sure of is that he failed. Some of this advice is valid, I think, especially the part about putting the right people in the right seats, which Paulson definitely didn't do. The part about humility is, well, you know. Businesspeople tend to use the word humility to refer to rationality and honesty in the face of unpleasant reality. If he's using it that way, he definitely didn't follow his own advice on that one.

The point of this is that Paulson is a douche, in case that wasn't apparent already.

In Times of Economic Peril, Invest in the Rights to Atlas Shrugged

2009-02-28T16:41:00.003-05:00

A delightful little article in this week's Economist discusses a phenomenon obsessive Objectivists like me have already noticed: sales of Atlas Shrugged have been increasing steadily, spiking with each new government intervention. This month, Atlas climbed to 33rd on Amazon's bestseller list, briefly surpassing Obama's The Audacity of Hope. I suppose this is the one bright spot about the current crisis. Since we knew it would happen one day, at least this time the American people are armed with a moral defense of capitalism they lacked the last time the economy took a nosedive and a charismatic leader tried to shove a bunch of government programs and economic hurdles down their throats.

Now is an excellent opportunity to take advantage of the attention on Rand and Objectivism and write in to radio shows and newspapers, extolling the Objectivist perspective in your area of interest. I plan to submit a guest op-ed to Indiana's student paper next month.

In other book news, Rainelle and I went to the local library's used book sale yesterday, and in addition to copies of Friedman's There's No Such Thing as a Free Lunch and P.J. O'Rourke's Eat the Rich, I found a good-condition, hardcover copy of George Reisman's epic economics tome, Capitalism, for $1. This book retails for $95. I cannot express how excited I am.

What I Have Found About CEO Pay

2009-02-27T14:37:00.003-05:00

There was a pretty good op-ed in the Wall Street Journal the other day describing how the amount of CEO pay is not the problem, and how we should be concerned more with the method of payment. The writers seem to imply the government should get involved, but other than that, their observation of the problem in executive compensation is pretty true, namely that executives are not compensated for long-term corporate performance, even though they are supposed to be.

I wrote my senior thesis on this topic, and what I found was that "long-term compensation" does not have any relation to long-term thinking or performance. This does not mean the government should get involved, but it does mean that boards need to get off their asses and design original ways to compensate their employees.

An interesting phenomenon I found was that pay packages that included goal-based remuneration tended to yield more manageable results amid the present financial crisis than did flat-out grants of stock or stock options. Objectivist business scholar Edwin Locke has produced excellent research on the positive performance effects of setting goals.

This is an area I intend to research more deeply over the years. It is unjust to provide employees (executive or otherwise) with vague goals, compensate them for something totally different, and then chastise them for not achieving a more specific goal you never laid out. Rational achievers will not want to work under such conditions. Providing specific goals, and linking pay to achievement of said goals, is not a sign of distrust in the executive, it is a clear signal that you know what you want, and you trust the executive to come up with some way to achieve it.

I will write much more on this topic over time.

What Happens When You Let Jim Taggart Run Your Company

2009-02-25T18:52:00.002-05:00

As I sat in my Management class this morning, wavering from side to side and staring out of focus due to lack of coffee (I was running late) I glanced down at my Wall Street Journal and at the beginning of this front page article, I spied these nauseating sentences:

In a recent phone call with a senior government official, Citigroup Inc. Chief Executive Vikram Pandit revealed who's on top in the new world of American finance.

"Don't give up on us," Mr. Pandit said, pleading with the official not to push out top management. "Give us a chance to execute."

If I might channel John Stossel for a moment, "Give me a break!" Really, Pandit? "Don't give up on us"? "Give us a chance"? What a little whiny bitch. Is this what business in America has become? Apparently, if you accept the Journal's estimation in the first paragraph. Reading about Citigroup or GM or Chrysler, I can just hear the voices of Jim Taggart or Orren Boyle screeching from the pages of Atlas Shrugged: "Give us a chance!" "It's not fair!" "We need a chance to succeed too!"

What, I wonder, would giving up on Citigroup constitute exactly? Letting them fail? Not a terrible proposition. Breaking them up into little Citipieces? An even better idea. It seems that Pandit, on behalf of his shareholders, is intent on perpetuating the illusion that Citi is still a private enterprise. News flash: it isn't. Honestly, and yes this is me saying this, I would prefer all out nationalization of Citi to this farcical capital injection Beckett-esque production. Maintaining a nominally private institution just to serve as a vehicle for politicians' policy fantasies is worse than the government taking over a bank. The government takes over insolvent banks and turns them over all the time. On the other hand, the former situation is exactly what transpired with Fannie Mae and Freddie Mac. And look how well that turned out.

Bottom line: If you can't run a successful (aka profitable) business on your own without begging feckless bureaucrats to "give us a chance," then you do not deserve to be in business. End of story. Pathetic displays like this one only perpetuate the government and the public's perception that businessmen are bungling idiots (don't get me wrong, some are). Meanwhile, the remaining capitalist heroes are too busy attempting to navigate the socialist waters to stand up for basic principles. That's our job.

Accounting Bitch #2

2009-02-23T22:40:00.002-05:00

John Allison's superb speech that I posted on a few days ago raises an accounting issue I would like to bitch about now. The issue is "Fair Value Accounting," and Allison discusses it in depth. I cannot add much to what Allison said, but I can try to sum it up and provide a brief explanation of why this particular accounting requirement is evil, both morally and epistemologically.

The rule in question is one which states that certain assets must be regularly marked down in value to accurately represent their "Fair Market Value," or the value at which they could sell it today if they had to. In most firms, this kind of accounting is limited to what are called "tradable securities," those securities a firm owns, but actively trades. These can be contrasted with available-for-sale securities and hold-to-maturity securities. These are not "marked to market" normally. Typically, these assets do not constitute a large portion of a firm's balance sheet, and the effect is negligible. In fact, this use of mark-to-market is actually quite appropriate.

In finance, however, for the last two years, banks have been required to mark their asset-backed securities to market value. This violates a fundamental principle behind the mark-to-market tool, namely that management must be intending to sell the asset in question. Allison points out that it is dishonest to write down an asset as though it were to be sold when management intends to hold it and collect its cash flows.

Now, this was not much of a problem until the market for mortgage-backed securities dried up and no one wanted to buy them. By law, banks must write down these assets to fire-sale prices because those are the only prices people are willing to pay. This is ludicrous, though, as Allison points out, because a market requires both a willing buyer and a willing seller.

So, you might be saying "Ok, it's a pain, but investors understand that these assets are still bringing in cash and are worth a lot more. They'll price that in. What's the big deal?" Normally, your logic would be correct. However, this is America, where we have laws to make sure logic is never correct. If a bank's equity drops below a certain percentage of capital (say, due to massive write-downs of its assets) it has to go to the capital markets and raise new capital. If it cannot, it must shut down, by regulatory fiat, even though it might still be generating positive cash flow. Another delightful aspect of the combination of accrual-based accounting and bumbling regulators.

Enter bailouts. Enter systemic risk and crisis. Enter his Obama-ness, fixer of things, bringer of change.

Following the Yahoo! Story

2009-02-22T23:53:00.002-05:00

Yahoo! CEO Carol Bartz, whom I discussed on this blog earlier this month as a capitalist to watch, looks to be shaking up Yahoo! right from the get-go. From the sound of this article, it seems like she has a clear vision for where she wants to take the company, but at the same time is staying attentive to the ideas of employees who have grown with the firm. This is sound management at its best: Leading through a strong vision, but keeping details open to input from the trenches. It will be interesting to see if these changes can pull the company around.

John Allison is God

2009-02-22T10:30:00.003-05:00

The Ayn Rand Institute finally posted the video from BB&T Corp. Chairman John Allison's January 29th speech on the causes of the financial crisis. I just watched it and it is a concise and yet inclusive depiction of the multitude of factors that culminated in the present financial catastrophuck-up. For the business-educated, the speech provides a panorama of the financial landscape, naming specific culprits, such as Fannie Mae and Freddie Mac, the Fed, the SEC, and several others. The conclusions he draws are so technically obvious by the end, that one wonders how any policy makers could possibly be innocently ignorant in this process.

For the layman, the speech might get a tad technical at times, but Allison explains himself along the way so as to make the material accessible to anyone. For those of you who have only a cursory understanding of the financial and real estate markets and the causes of this crisis, I highly recommend viewing this video. Allison depicts the crisis in a logical, sequential manner, highlighting how a combination of disastrous government policies inflated the housing market, masked riskiness of investments, protected unhealthy but well-connected firms, discouraged prudence and thrift, as well as a number of other undesirable outcomes.

What continues to amaze me, but shouldn't, is how the government repeatedly distorts a market (such as housing) for its own political gain, and then proceeds to prolong, exacorbate, and further distort the market correction that is a direct result of its own interference. The ultimate and most disturbing tragedy of the government's handling of this crisis (there are many others) is the effect it has on the most productive, virtuous members of society. Allison repeatedly mentions how the government's actions discourage banks to be healthy, discourages smart, talented, rational individuals from entering a the industry, and all-around incentivizes people who might otherwise lead successful lives to be lazy, stupid, dependent contradictions of themselves.

The larger grows the state's reach, the more good people at the margin get sucked into moral depravity. (Naturally, by moral depravity I mean that they systematically and consciously destroy their own lives) Every day it requires greater strength and resolve simply to pursue one's happiness.

Lately, I am reminded of a line from Casablanca that I think sums up the despair and sense of futility that government control engenders in people. When Victor Laszlo and Ilsa Lund are meeting with Signor Ferrari in the Blue Parrot seeking an exit visa to Lisbon, Ferrari tells them getting two visas "would take a miracle. And the Germans have outlawed miracles." That is my main fear for the future, that the powers in Washington will steadily and systematically outlaw everyday man-made miracles.

How Capitalist Capital Markets Should Work

2009-02-20T10:12:00.003-05:00

Amidst the deafening moans for bailout money issued from across the business landscape, it is refreshing to see just one instance of the good, old fashioned capital markets working again. In the old days, before "bailout" became a source of competitive advantage, firms who needed funds to support operations went to capital markets. Depending on their risk and return, these firms would raise debt or equity cash, and investors would take some form of a stake in the firm. In those days, you had to compete with other firms for funds based on your virtues as a business, catering to the self-interest of investors. Now, you go to the government, hat in hand, and compete with other firms based on your vices, catering to bureaucrats and politicians' sense of pity. Who might have the strategic edge in that race?

As I said, it is refreshing, then, to see the capital markets return once in a while, to remind us what honorable business looks like. As this article describes, Sirius XM has been in dire straights for some time. They have severe cash flow problems, stemming from the worsening economy, and the fact that their business model is shaky at best (Howard Stern notwithstanding). So, as their debt was about to come due this month, rather than ask the government for handouts, they found a businessman, in the form of Liberty Media's John Malone, to take on a large portion of their risk in exchange for a sizable return. Notice, an individual made the choice with his money, eyeing his self-interest, to invest in a struggling enterprise. No one had to be coerced; no one's tax dollars were devoted to a dying cause. If enough dollars think the business is worth saving, they will find their way to that business through capital markets. The government needn't offer its dubious services.

The satellite radio industry is a very interesting one, in my opinion. I did some writing on it over the summer when I was working at The Heartland Institute. At that time, I was defending XM and Sirius' right to merge. Clearly, the merger did not help them get out of their hole much, but if they can stick it out through this downturn, they might be able to rebuild their market in a couple years. The important take-away point is the economic efficiency and moral superiority of capital markets, as compared to bumbling government failure funding. Capital markets reward expected future success with present funds. Governments, when they grace the economy with other people's stolen money, reward expected future failures, leaving successful firms to fend for themselves in a depleted private financing market.

Chicago Derivative Party?

2009-02-19T16:58:00.003-05:00

Some acquaintances posted this video on facebook, and I thought it mighty appropriate to link to it here. I can't show the video on my site, but I highly encourage everyone to watch it. It's only about 5 minutes long. So go watch the video. I'll wait...Go!

Assuming you've watched the video, I'll continue. The sight of a trading floor full of capitalists shouting their disapproval of Obama's attempt to socialize home ownership just warms my heart. Frankly, I think the idea of a Chicago Tea Party, complete with tossing worthless derivative securities into Lake Michigan, is a fabulous idea, and I'm ready to hop in the car right now if they try it. It's good to know that out there, in the financial trenches, capitalists who love freedom and love money still exist, and they are PISSED OFF.

This raises an interesting issue, which is that as mad as we are about the rising tide of collectivism in this country, we do not go on strike (Colorado isn't the inviting wilderness safe from government snooping that it used to be) and we don't fight back. Sure we write op-eds and letters to the editors of major newspapers, but those fall on deaf ears, save for a few exceptions. The reason for this is that as bad as things are, our lives are still better (or at least more stable) than they would be if the country were hurled into all-out revolt. The question then becomes "How much is enough?" How much will the general populace (Objectivists alone would stage a pretty pathetic revolution) put up with before they fight back? Where is the breaking point?

I must admit, it would take a lot for me to want to set aside my long-term personal and professional plans and pick up a gun. It would, in fact, require that those plans become no longer viable. For some people wanting to go into medicine, that point might be fast approaching. For me, the intellectual, I think I have time. Still, with the way our country is progressing, it might not actually be that long.

Management Bitch #1

2009-02-17T23:17:00.002-05:00

Sorry my writing is beings spaced out a bit more lately. This week is heavy on the exams. Which brings me to my post for today. In studying for my management exam (organizational behavior, to be specific) I find myself forced to memorize a litany of useless, repetitive terms in order to do well on the test. Now, I have a deep respect for management studies in many respects, but the let's-make-ourselves-sound-important vocabulary that management intellectuals devise sends me into convulsions, especially when I am expected to regurgitate it tomorrow morning. Here are some of my favorites; see if you can tell what they are or if they are good or bad:

Efficiency Diversity
Repair Service Behavior
Goal Inversion
Management of Cues
Anchoring and Adjustment
Fundamental Attribution Error (No cheating, this one's obviously bad)

Alright, go memorize these and the quiz will be tomorrow. Don't bother finding out what they mean. I just want you to vomit them onto a sheet of paper like I have to in the morning.

How Short Our Memories Are

2009-02-15T15:43:00.002-05:00

Scanning the Fox Business website (I don't know what I was thinking, either) I stumbled across what I consider to be one of the more evil and pernicious pieces of writing I have seen in a while. The author, one Al Lewis (not to be confused with Grandpa from the Munsters), describes the farce that was the Congressional testimony of major bank chiefs this week, and proceeds to flat-out deny their claim that they were forced to take bailout money. In addition to spreading abject falsehoods, Lewis' article reads like a romantic tribute to the efforts of selfless, crusading politicians. A few excerpts for your reading displeasure:

The story goes like this: One dark October day, the U.S. Treasury Secretary pulled CEOs of nine major banks into a room and forced them to accept billions and billions of dollars from the federal government.

Many of these bankers didn't want the money. Didn't think they needed the money. And didn't care to shock their shareholders by taking the money.

The spend-happy Bush administration, as if eager to introduce a virulent new form of socialism, simply rammed all these freshly minted dollars right up their big, fat pneumatic tubes....
Some bankers actually tried to maintain this bizarre myth in their testimony before the House Financial Services Committee on Wednesday.

"At the urging of the U.S. government, Bank of America accepted ... TARP money," CEO Kenneth Lewis told the committee, his eyes bulging like those of a man at a 12-step meeting recounting his helplessness in the face of horrendous abuse....
Barney Frank, the Massachusetts Democrat who chairs the House committee, put a swift end to these absurdities with a generous offer.

"If you want to give back the money, we will take it," he said. "And if there are any obstacles to your giving it back, legally, we will undo those obstacles."

Somehow, nobody volunteered.

What Lewis fails to mention is that a clause in the bailout contract forbids banks from paying back the money until they have raised extra private capital to replace the federal funds. Bah, details! This article is an absolute insult to journalism, flagrantly mocking bankers for telling the truth, as it was documented at the time in the WSJ, the New York Times, and this excellent letter to the editor written by a very conscientious citizen. CEOs of healthy banks were, in fact, forced to take TARP money under threat of arbitrary regulatory vigilance. What is even more depressing about this article than its factual inaccuracy is the facts it does present, namely the statements from bank CEOs. Businessmen today reject the moral foundation of capitalism, their own rational self-interest, and embrace a sort of mealy mouthed altruistic justification:

For Wells Fargo & Co. CEO John Stumpf, it was his patriotic duty to accept this money.

"We're Americans first, and we're bankers second," he told the committee. "So we see this taxpayer investment, first and foremost, as an investment in the future economic growth of our country. We're proud to be an engine of that growth."

Needless to say, this justification does not support an argument for individual rights, and so this happens:

Alabama Republican Rep. Spencer Bachus then asked Stumpf if Wells Fargo was indeed forced to take the money, as earlier reported.

"We've clarified our statements," Stumpf awkwardly replied. "We're happy to have the money."

In adopting an altruist stance on the survival of his bank, Stumpf is forced to deny even real, provable facts that occurred. Without a proper philosophical grounding, these gentlemen are powerless against the ludicrous accusations of Congress. When two sides agree not to think rationally, the most irrational will win.

I encourage everyone to read the article I referenced. It should make clear just how corrupt elements of our society are.

The Stimulus Silver Lining

2009-02-14T01:37:00.003-05:00

Well, Congress finally passed the damn stimulus, in all its spending glory. As it heads to the desk of the one called Obama, there may be a piece of it worth cheering. Now, I know what you're thinking, and no I haven't switched over to the dark side. Hear me out. This WSJ article describes what I'm talking about. Here's a slice:

The giant stimulus package that cleared Congress Friday includes a last-minute addition that restricts bonuses for top earners at firms receiving federal cash -- including those that already received it -- more severely than the Obama administration's previous pay limits.

I know what you're thinking, but keep reading.

The most stringent pay restriction bars any company receiving funds from paying top earners bonuses equal to more than one-third of their total annual compensation. That could severely crimp pay packages at big banks, where top officials commonly get relatively modest salaries but often huge bonuses.

As word spread Friday about the new and retroactive limit -- inserted by Democratic Sen. Christopher Dodd of Connecticut -- so did consternation on Wall Street and in the Obama administration, which opposed it.

Just wait...

The administration is concerned the rules will prompt a wave of banks to return the government's money and forgo future assistance, undermining the aid program's effectiveness. (Emphasis added)

And wait, there's more:

In speaking to Mr. Dodd, Messrs. Geithner and Summers also expressed concern over another provision he inserted that lets banks and other aid recipients pay back aid more easily. It says banks would no longer have to raise new private capital to replace the government's funds in order to repay it.

Hallelujah! We have found our deliverer, and it is Chris Dodd, the esteemed Senator from the great state of Connecticut (see picture below). With any luck, the healthy banks will bail on the bailout, and the unhealthy firms like Citigroup and Morgan Stanley will be left to wither and die as it always should have been. I have no idea why Dodd added the clause to the stimulus package making it easier for banks to give back the capital. I think it may be that he simply is an idiot. Regardless, that little caveat has turned what would otherwise be an egregious infringement on individual rights and all-around insult to everything good about humanity into an escape hatch for healthy banks suffocating to death in the smothering embrace of the Treasury Department's enormous meddlesome bosom.

(Here we see Chris Dodd during his audience with Her Majesty, the Queen of England)

In other stimulus news, Governor Mark Sanford of South Carolina seems to be the only sensible governor out there. He spent months fighting the stimulus bill, and may now reject any of its funds for his state. He's a favorite to run for president in a few years. That's one to watch out for. He'll probably disappoint, but it doesn't hurt to hope. Thanks to Steve for the link to Sanford's article on CNN.com.

Who Knew I Was Rich?

2009-02-12T23:42:00.003-05:00

Last night I did my taxes and discovered, to my shouting, cursing chagrin, that I owed Barack Obama and his government $400. This astounded me, considering I would have thought my meager $8,000 income last year to be below the bottom tax bracket. What I found, however, is that if you get income from interest, dividends, capital gains, and scholarships, as I did most of mine, your income is treated quite differently than if you received the same amount in wages. That, children, is because only evil rich capitalists get dividends, and only greedy Jewish bankers receive interest. In case you were not aware, the deck is massively stacked in this country against frugal individuals such as yours truly, who save their money and invest it, with the hope of one day being wealthy. The government has no desire for you to become wealthy, and would rather you spend yourself into one day requiring a bailout.

Now, this incident got me thinking. I contend that I have no moral obligation to pay taxes, only a legal obligation, under threat of fine and imprisonment. On the other hand, I do take advantage of public services, such as education, so I should pay for those, right? I only feel justified in consuming government product because I, or my parents, paid for it in taxes.

This leads me to my main point: the greater government's involvement in people's lives, the more difficult it is to act morally. Rand may have commented on this; I can't remember. Nonetheless, as Objectivists, we often talk about how capitalism is the only system that enables man to act morally (i.e., in his rational self-interest) This makes sense, since only the individual can decide what is in his interests, that individual must be free to make that decision. But it also applies to how we pursue our self-interest around others. Most of us would delight in never living for another's sake or asking another to live for ours, as the oath goes. The more government taxes us, however, the more we are obligated to. As the government taxes us, we are coerced into engaging in a trade we do not want. But should we then foresake the benefit from the trade?

If you have the means, you might be better off just paying taxes and avoiding any further government contact. For most of us, though, this option is too expensive. It is too expensive for many to pay property taxes for one child to go to school and then pay more tuition for their own children to attend school. So, we reluctantly take the upside of the involuntary government trade and get sucked further into the black hole of the welfare state. Even if we want to avoid living off the state, the growth of the state's influence makes doing so almost impossible. There are select few (two or three, probably) colleges that do not take any government funding, and these are liberal arts colleges. So what is the alternative? Don't attend college? There really is no option but to take the government bait and deal with it.

This is the situation we live in, one in which moral action is slowly being made illegal. Maybe we can do something about it. It will take a lot of work, though.

P.S.: Sorry about the morose post. I just did my taxes, what do you expect? I'll try to be more upbeat in the future.

A Few Comments on Previous Posts

2009-02-11T15:12:00.004-05:00

Treasury Secretary Timothy Geithner had one job, as far as I was concerned in my post on the matter. The one good thing he could have announced yesterday regarding the O-ministration's plan to "save" the financial industry was that this was it. No more Bush-esque flying by the seat of our pants; we're picking a method and that's going to be it. More than taxes, regulation, or anything in between, the market hates ambiguity. FDR prolonged the Depression mainly through making investors scared to put their money in anything, for fear that Delano would change his mind about something next week.

So naturally, what does Geithner announce? He declares a broad-based plan the administration has devised, involving capital infusions, public-private partnering to buy toxic assets, and lots of other wastes of taxpayer money. The one thing missing from Geithner's announcement? CLARITY. Due to a lack of details, the market, especially financials, took a long, wet bath yesterday. What investors know, and what Obama may or may not know he is divulging, is that the guys with guns have no clue what they're doing, and are ready to try anything. Anything, that is, except nothing. Thank goodness Bush is out of office, right? Mmm...that's good change.

In other news, I am making a commitment now, as an incentive to generate comments, to respond to any thought-provoking comments or questions on this blog in post form. As such, I would like to respond to some comments Mitchell made on my Accounting Bitch #1 post. Mitchell writes:

Accrual based accounting works better in some instances. For example, if I sell an ad for a year on my blog, I get paid all at once, but the revenue is really earned over a 12 year period.

And as for accounting being a privately designed system... That would just make it be very inconsistent and manipulated. Every company could inflate their assets like Enron and there wouldn't be anything to stop them, then investors would get screwed.

First, regarding accrual based accounting: yes, in some instances accrual based accounting is more appropriate than cash-based. The idea inherent in Mitchell's example is called the "matching" principle, an accounting principle that states that revenues and expenses should be matched and recorded according to when they are earned. This is a valid concern, as cash results can make a company appear less profitable or more profitable than they really are. However, we must ask ourselves what the purpose of accounting is, and the main purpose is to represent the health of the firm. Mitchell's example could misleadingly make his website look secure, showing steady revenues over the course of the year, when in fact he is burning through cash and won't be able to replenish his reserves until the end of the year. A profitable firm can go bankrupt simply because of the timing of its cash flows. Something to consider.

My main beef with accrual-based accounting, however, is the haphazard, upside-down, rules-based way the government forces it on all public companies. Principles-based accounting versus rules-based accounting is another discussion topic altogether, but basically if the government is going to enforce any accounting regime, it necessarily must become rules-based. This is analogous to the difference between common law and statutory law. A written statute enforces rules, not principles. This pertains to Mitchell's second point, which is that companies would inflate their earnings. Again, there is a link to common law versus statutory law. Shareholders can always sue for fraud. The problem comes when it becomes impossible to prove fraud, because financial statements, misleading though they may be, are technically in accordance with federal statute. All sorts of private rating systems exist, from J.D Power and Associates to Underwriters Laboratories to the Good Housekeeping Seal of Approval. All of these systems rely on the reputation of the raters, and they guard those reputations very closely. Private accounting systems would be no different.

Side note: In an excellent book I've reference before, The Forgotten Man by Amity Shlaes, the author recounts a delightful story of how a female executive of Good Housekeeping, while a guest at the Roosevelts' home during the Depression, expressed great frustration with the President for undermining her business by strengthening the FDA. You just don't hear stories like that anymore.

Yahoo! Bets on a Capitalist

2009-02-09T16:26:00.005-05:00

Last month, Yahoo!, the company that owns that search engine none of us use anymore, appointed Carol Bartz as CEO to succeed founder and former CEO Jerry Yang. Mr. Yang will returned to his previously held position as the appropriately named "Chief Yahoo." This article in The Economist offers a brief glimpse into Ms. Bartz's life. I had never heard of her before Yahoo named her CEO, but certain traits mentioned in the article grabbed my attention. Consider this short bio:

She was born in Minnesota but lost her mother when she was a child, so her grandmother raised her in a small town in Wisconsin. This early setback appears to have left Ms Bartz with insecurities that would forever motivate her to achieve. She became a homecoming queen and a mathematics star in high school. She worked her way through college by serving cocktails, maintaining a Spartan exercise regime in order to fit into the uniform—a red miniskirt and black fishnet stockings.

Ms Bartz then went to work at 3M, one of America’s blue-chip companies, in the 1970s. But when she requested a transfer to headquarters, she was told that “Women don’t do these jobs.” She walked straight out of 3M and into the computer industry. Eventually this led to her big break, when she was appointed chief executive of Autodesk. But there was a catch.

Just as she began her new job, Ms Bartz was diagnosed with breast cancer. She was 43 at the time, and decided to fight on all fronts. She took a single month off work for a mastectomy and reconstruction, and then went back to her new job full-time, while having chemotherapy for seven months on the side. She defeated her cancer, gained weight and lost it again, and launched Autodesk into a period of astonishing growth.

Her discipline was iron—and possibly excessive. To keep her family in Atherton, she commuted to the office, which required a long, traffic-clogged drive across the Golden Gate Bridge. To regain these lost hours each day, she spent the whole time behind her chauffeur reading and working, often stopping several times along the way to throw up out of carsickness. Her driver knew all the best places to pull over along Highway 101.

The article stipulates that, since Autodesk, while very successful, is much smaller than Yahoo, and since Ms. Bartz has no experience in Yahoo's market, the main reason Yahoo picked Bartz for the top spot is simply that she is one tough bitch (my words, not theirs). In addition to her perseverence and drive, she exhibits a rare quality a good capitalist must have to be successful, appreciation of ability in others. Consider this:

Unlike a lot of men in her position, Ms Bartz kept her power in perspective. She had groomed a successor at Autodesk and became worried that he might leave if she stuck around too long. So she made way for him and became Autodesk’s chairman. “There is a real difference between managing and leading,” she once said. “Managing winds up being the allocation of resources against tasks. Leadership focuses on people. My definition of a leader is someone who helps people succeed.”

I would say this characteristic makes her unlike a lot of people in her position, but I won't split hairs. In his book, The Prime Movers, Objectivist business scholar Edwin Locke devotes an entire chapter to the absolute necesity of nurturing human ability if you are a CEO. Poorly planned CEO succession can be absolutely devastating to a corporation. (See: Oh, let's start with GE and work our way down by market value)

It will be very interesting to see if Bartz can salvage Yahoo and turn it into something decent for its shareholders. If she can manage a successful turnaround, or even a beneficial sale of the company, she might earn herself a place in the business history books.

Voldemort, Feng Shui, and A Not-That-Terrible Idea from the White House

2009-02-09T10:55:00.008-05:00

Three note-worthy stories that made the WSJ's front page today:

The first concerns Voldemort, by which I of course mean General Motors. Just when we thought GM couldn't get slimier, this story breaks out. Apparently, Voldemort is still reeling, despite the government's attempt to reverse overwhelming wisdom. (Damn, and I really thought it would work this time.) It seems that people really just don't want to pay for cars made with $70/hr labor and subjected to ludicrously costly CAFE standards. Go figure. Anyway, rather than sell of pieces of the company or close up shop, this indispensable American institution has determined that the obvious solution to its problems is...you guessed it: more bailout money.

But asking for more money would be difficult in the current anti-big business climate, so GM's brilliant plan around this hurdle is to become even "too big to fail"-er. Yes, that's right, GM wants to take back part of Delphi, the auto parts manufacturer it spun off several years ago, in an effort to convince the U.S. to pony up more dough. This is the state of business today, if you're a failing corporation, don't downsize, don't attempt to return to profitability; just acquire an even worse company, a bankrupt company, in the hope that you'll look even needier and more pathetic. This is the shortest of short-range perspectives. How taking on Delphi's burdens and getting a few extra worthless federal handouts will carry GM more than an extra week eludes me. American corporatist myopia has reached a new low.

On the other side of the world, mysticism is thriving in one of the world's freest cities as the threat of financial insecurity turns wealthy investors into quivering sheep at the foot of the nearest witch doctor. Today's featured school of voodoo: feng shui. Yes, the masters of wind and water are making a killing on scared, stupid, and scared stupid investors. Some of the most delightful insights

"The incoming U.S. president and [Treasury] secretary were both born in the Year of the Ox," said one client. "Is that a problem?"
Mr. Yeo's answer: Yes. The pair of oxen in charge of the U.S. economy could be an accident waiting to happen. Hold out until after January 2010 before investing in the U.S., he advised.
"This year, with the economy and the stock market so bad, I wanted to come and ask about the future," said Mr. Lee, who says he still has substantial holdings in the stock market. "It can't hurt to hear another opinion, right?"
"Investors used to trust banks and mutual funds," says Liu Qiao, a professor at Hong Kong University who studies behavioral finance. "Now, people see professional bankers making very stupid mistakes, and I think that explains why so many people are going in different directions, to see feng shui masters or pray at temples."

So let me get this straight. Investors lost money because of irrational expectations about the future, so now they are consulting the stars to tell them which stocks to pick? Forgive me father, for I have invested in Fannie and Freddie. How do you feel about biotech?

I suppose I shouldn't be surprised. In times of crisis, the weak and desperate cling to their favorite rabbit's foot, praying that it will do their thinking for them. That said, I must say I enjoy the characterization of Obama and Geithner as oxen.

Finally, I cannot at this time unequivocally declare my hatred for the Obama administration's financial system bailout plan. Geithner will present the specifics tomorrow, but it looks like the government is planning to use a private-sector partnership to buy banks troubled assets. Normally, I would be against a private-public partnership (see: Fannie Mae and Freddie Mac), however, considering all the other horrible measures the government has in its arsenal, this seems fairly tame. It would provide a market for bad assets (albeit a distorted one) and banks and investors would reach an equilibrium for which assets would leave banks' balance sheets and which would stay, and at what price they would sell.

More important, however, is the big difference between Obama and Bush in the bailout department. Bush's ad hoc approach to the financial services industry made the market apopleptic. As Amity Shlaes poins out in her excellent history of the Great Depression, The Forgotten Man, what did more to prolong the Depression than any other measure was Roosevelt's haphazard experimenting with the market. Markets like to know what the government is going to do even more than they like it to stay the hell out of their business. The O-ministration seems to understand this, and has taken some time to present one plan (the last, with any luck) that is supposedly comprehensive. If they keep their word, the market can price in all the changes, and our economy can finally start to move forward with new investment. That's a big "if," though.

Accounting Bitch #1

2009-02-08T13:35:00.004-05:00

Occasionally, for the benefit of my non-business-educated readers, I will post on a specific element of business life that defies all logic, and thus creates endless frustration for me. For while at its root business, in all its creative and adaptive brilliance, is a beautiful phenomenon, there are parts of it that could drive an improperly equipped rational person insane. Naturally, most, if not all, of these stem from some kind of government influence, whether tax-, regulation-, or lawsuit-related. Needless to say, I doubt the well will ever run dry on this topic. So, without further ado...

Today's stupid business topic is accounting, and so is titled "Accounting Bitch #1." My first bitch with accounting is a general one. Accounting is "accrual-based" and not "cash-based." Allow me to explain. Most people think you record revenue when someone pays you for something and you record an expense when you pay someone for something. This might be true for some very small businesses, but any business that must report financial results must do so with an accrual-based method. The method is known as GAAP, or "Generally Accepted Accounting Principles." (This, of course, is a misnomer because GAAP consists more of rules than principles, and pretty much everyone hates them) These rules are enforced by the FASB, or Financial Accounting Standards Board, a "non-governmental" agency. I use quotes because once FASB has settled on standards, they are religiously enforced by a batallion of government bureaucrats.

GAAP has evolved over several decades, but today's bitch focuses on the fact that it uses "accrual-based" accounting, whereby revenues and expenses are recognized based on when they are earned, rather than on when cash is exchanged. In theory, there is not much wrong with this approach, and it makes sense in several industries. However, since the rules are enshrined in regulatory stone, all accrual-based accounting does is offer companies legal ways to obfuscate their results. Cash is cash, and it is impossible, without committing fraud, to be misleading about how much cash has come in or gone out, and how much sits in the company coffers. As an example of how accrual-based accounting can be misused, consider that Enron recorded millions of dollars in revenue on unsure projects that had not brought in a dime. Such a practice was completely legal, however, because they had secured the contract. That cash never came in, by the way.

Accounting is a necessary component of capitalism. It is the language of business, the common understanding that enables those with capital to find those with initiative and to create profitable ventures. The more the accounting system loses objectivity (it's been on a steady decline and has been accelerating recently) the more stagnant our economy will become because investors will not trust the numbers they are presented.

Ideally, accounting would be a privately designed system (or competing systems) for keeping track of assets, liabilities, revenues, and expenses. Short of privatization, the government should at least adopt a cash-based system and junk FASB's accrual-based nightmare. More on this in my next accounting bitch: Mark-to-Market rules

Notable Quote

2009-02-07T12:53:00.003-05:00

In the course of my research for my thesis on executive compensation in the banking industry, I stumbled across a quote I just couldn't exclude from my paper. The irony was too perfect. In his book, A Banker's Life, George S. Moore, the former president of Citibank, writes:

Speaking from a perspective of sixty years in banking and in business, I have to say that banking is the surest, safest, easiest business I have seen or known….If you’re not actually stupid or dishonest it’s hard not to make money in banking.

Now, a few preliminary comments about this quote. Moore ran Citibank in the 1960s, when banking, like most businesses, was considerably simpler. It was far more regulated, far less exciting, and consisted of, as my Money, Banking, and Capital Markets professor put it, "Fat men in suits playing golf." Since the 80s, banking has grown more interesting and more complex. Part of this can be tied to the proliferation of securitization of assets and the competition for financing. Nevertheless, even though the specifics of banking may have changed, the fundamentals are pretty much the same: Take in money, lend out money, take in more money, lend out more money.

Also, he is obviously understating the importance of intellect in banking. It is the "surest, safest, easiest business" if you have the business acumen to spy good investments. It seems easy to those who can do it.

That said, I find this quote hilarious for the obvious reason that so many bankers seemed to fall into the "stupid or dishonest" category in recent years. (Dishonest with themselves, and therefore stupid with their businesses) If I had to venture a guess as to the reason for the prevalent stupidity, I would blame the growing trend of business to align itself with the government at the upper level. For evidence, see Robert Rubin, the former Treasury Secretary who served on the board of Citigroup after his tenure in the Clinton administration until his recent resignation in disgrace. Also see Angelo Mozilo, the former CEO of Countrywide Financial who abetted Fannie Mae and Freddie Mac in their affordable housing binge in exchange for favors.

Putting government pull-peddlers at the tops of corporations sets the corporation up to serve the government, not its shareholders. That is exactly what happened in the mortgage crisis, and now the government, with its increased role in bank decision-making, is trying to repeat that catastrophe.

Lesson: If you want to run a business the way business is supposed to be run, don't stuff your boardroom or your corner office with "Men from Washington" whose only strategic advantage is that they have lots of "friends."

Salary Caps and The Brainless Voting Mob (The Sequel)

2009-02-06T08:48:00.004-05:00

Kyle raises an important point in his comment on the previous post, which incited me to ponder the issue a bit more in depth for the benefit of my readers. First to reply to Kyle, who wrote:

If an employee's cash payment is capped, but his overall compensation package is constant, then these guys get paid stock options. So, while you're right in that their total pay won't be changed, their interests will align more with the company's future, which in theory could be a good thing.

While theoretically, this should hold, there are a few mitigating circumstances. For one, stock really only provides incentives if it isn't a gratuitous grant. If the CEO doesn't feel like he's earned it, he'll treat the stock like a windfall, and not like an investment. The phenomenon is similar to people who win the lottery, and then blow it all in a year. I've spent about nine months studying CEO compensation in the banking industry, and I've found that "long-term" compensation, by itself, completely fails to spur long-term strategic thinking. Obama's pay caps simply hamper boards' ability to compensate for long-term results.

This brings me to my second point. At all but the largest banks, stock constitutes a less important portion of total pay. Cash incentives, both short-term and long-term, play a larger role, as this WSJ article points out.

Regional banks, which are one notch below the big nationals like JPMorgan Chase and BofA, stand to be hurt the most if this rule is expanded to encompass them. Several of these banks employ some kind of long-term incentive program, which uses a combination of cash and equity grants to reward executive for achieving or exceeding preset multiyear performance goals. This is the best compensation measure I have found, because it holds the executive to objective standards, as well as forces the board to specify exactly what kind of results it expects from management.

I am not sure if the Obama plan's loophole for "other long-term compensation" allows for this component (If it does, the plan will have even less effect than I previously thought.) If it excludes this type of plan, the consequences to those banks who know how to use cash compensation effectively will be dire.

Salary Caps and the Brainless Voting Mob

2009-02-04T22:53:00.002-05:00

When politicians speak, idealists like me typically vacillate between two alternatives, either the politicians is evil, or he's stupid. Rarely does an elected official say something so bashing-my-head-against-the-wall stupid that you can be sure he doesn't believe it. In that case, he's just plain evil.

I had such a moment when I read President Obama's statement that he intended to impose a $500,000 cap on executive salaries at those firms who accept "extraordinary assistance." (I'm not sure what "extraordinary" means, but that fact that any assistance is "ordinary" pisses me off.) Disregarding the utterly arbitrary nature of the $500,000 benchmark, the salary cap will be, like the upcoming stimulus package, impotent at best.

Typically, government wage control sends talent fleeing. The way that firms get around this is that they invent new forms of compensation not controlled by Uncle Sam. During World War II, in order to retain talent under wage controls, firms began offering health benefits to their employees, giving us the wonderful third-party payer system we enjoy today. (Thanks, FDR!) In the early 1990s Congress got their adult diapers in a bunch over CEO compensation (it's like crack to them) and they capped the available tax deduction of CEO salaries at $1,000,000. As a result, salaries were cut to $1,000,000 or less usually, and stock options became far more popular. Total CEO compensation skyrocketed over the years. Score one Congress.

This brings me to Obama's decision to cap executive comp. at extraordinarily bad companies. Anyone who has ever looked at a proxy statement knows that salary makes up about 5% or less of these guys' total pay. Under Obama's plan, the executive can still get stock options. Since Obama is not in a coma, he understands this. There is no ambiguity about any of this. He has to know just how pointless this measure is. If it will do anything, it might scare companies from taking more TARP money. If that happens, then I am greatful to Mr. Obama for his politicking.

In this instance, we can be absolutely sure that Obama is not stupid. Someone had to know that this measure will change nothing. It's not stupidity this time; it's just good old fashioned "voters'll believe anything we tell them" politics.

The CEO Mentality

2009-02-03T20:19:00.003-05:00

The front page of the Wall Street Journal featured an interesting article on CEOs' second chances, focusing on one CEO in particular. The article raised, perhaps inadvertently, some issues of what kind of person becomes a CEO and what the market for top jobs is like. Here are a few key excerpts:

When Joseph Galli Jr. got forced out as chief executive officer at Newell Rubbermaid Inc., he was certain he would brush himself off and try for another CEO job. From his father, a school dropout who built a successful scrap yard near Pittsburgh, Mr. Galli learned to work hard and never give up.

But the lessons that propelled Mr. Galli to the top of the corporate world proved less useful in selling himself to a new employer. Instead, he encountered a paradox known to many out-of-work CEOs: Though they are driven like few others to succeed, once they fail, many don't get a second chance to run a public company.
Mr. Galli is an exception....He endured a year of humbling unemployment and self-reflection before returning to the corner office, this time as the CEO of Techtronic Industries Co., a Hong Kong-based manufacturer of Ryobi power tools, Homelite outdoor products and Hoover and Dirt Devil vacuum cleaners.

I encourage everyone to read the full article to learn the details of Mr. Galli's life, but if you don't, these paragraphs represent the essence of the man:

During an overnight stay at the 26-acre Galli farm in Maryland, Mr. Pudwill asked Mr. Galli to run Techtronic's roughly $450 million floor-care division...

Mr. Galli was prepared. He brought Mr. Pudwill to his basement and handed him a one-page summary of a 15-page strategic plan for expanding Techtronic. He scribbled details on a whiteboard. Mr. Galli proposed moving the company into South America, among other things, and trying to dominate the market for cordless power tools. They talked until nearly dawn.

In November 2006, Mr. Galli took over Techtronic's ailing floor-care unit. He and colleagues say he cut costs, shifted U.S. production overseas, strengthened management and sped introduction of new products. The unit lost money in 2007 but turned profitable in the first half of 2008.

I like this article, because this scenario is so representative of the kind of capitalist hero that Objectivists admire. These individuals do exist, and a disproportionate number of them work in the corner office. The drive to succeed, the singular vision, and the constant idea-generation are rare traits among the general populace, but are more common among CEOs, as the article mentions. Many people, if they had fallen from the top spot at Newell Rubbermaid, would have taken what was left of their wealth, given up, and felt miserable the rest of their lives. It is so refreshing to read about Mr. Galli scribbling grand ideas on a white board in his basement for the Chairman of a public company. I know nothing about Mr. Galli other than what I read in the article, so I cannot say I endorse everything about him. Based on what I do know, however, I don't think I would mind sharing a drink with him.

The article raises another issue I think people often fail to understand. CEOs exist in an unusual job market. If you're in demand, you can demand exorbitant pay for your services. That only applies to the best and best-known, however. Far more CEOs get one shot, and if things do not go as planned, they are very likely to be let go, and never hired as CEO again. It is an incredibly stressful position, and most take the stress in stride.

Slimeballs exist in every profession, and chief executives are no exception. Nevertheless, to climb to the top of a corporation requires talent, drive, and a fundamental rationality most people never achieve. Those of us who understand the value of productive work can take solace in the knowledge that, despite the big names' behavior of late, many CEOs still display the virtues their position demands.

Happy Birthday Ayn

2009-02-02T16:12:00.004-05:00

I often wonder in these trying times how Ayn Rand would comment on the current goings on in business and politics. I imagine something north of a conniption fit, infused with flawless logical rhetoric, of course. Since Mama Bear is not around for us to pick her brain (she died in 1982, for those of you keeping score) and since today marks the 104th anniversary of her birth, I thought I would offer some pertinent bits of her timeless wisdom, taken from this blog's namesake, Francisco's Money Speech. Here are a few to settle your stomach while you're digesting the latest news out of Washington:

It is not the moochers or the looters who give value to money. Not an ocean of tears nor all the guns in the world can transform those pieces of paper in your wallet into the bread you will need to survive tomorrow....Your wallet is your statement of hope that somewhere in the world around you there are men who will not default on that moral principle which is the root of money.

Money is made before it can be looted or mooched--made by the effort of every honest man, each to the extent of his ability. An honest man is one who knows that he can't consume more than he has produced.

Money will always remain an effect and refuse to replace you as the cause. Money is the product of virtue, but it will not give you virtue and it will not redeem your vices. Money will not give you the unearned, neither in matter nor in spirit. Is this the root of your hatred of money? (I dedicate this quote to Citibank, AIG, GM, Ford, Chrysler, and all the rest of the boys)

Men who have no courage, price, of self-esteem, men who have no moral sense of their right to their money and are not willing to defend it as they defend their life, men who apologize for being rich--will not remain rich for long. They are the natural bait for the swarms of looters that stay under rocks for centuries, but come crawling out at the first smell of a man who begs to be forgiven for the guilt of owning wealth. They will hasten to relieve him of the guilt--and of his life, as he deserves. (Emphasis added, in case Warren Buffett is reading.)

And finally, a quote that all conscientious individuals should remember, both for its eloquence and for its chilling accuracy:

Watch money. Money is the barometer of a society's virtue. When you see that trading is done, not by consent, but by compulsion--when you see that in order to produce, you need to obtain permission from men who produce nothing--when you see that money is flowing to those who deal, not in goods, but in favors--when you see that men get richer by graft and by pull than by work, and your laws don't protect you against them, but protect them against you--when you see corruption being rewarded and honesty becoming a self-sacrifice--you may know that your society is doomed. Money is so noble a medium that it does not compete with guns and it does not make terms with brutality. It will not permit a country to survive as half-property, half-loot.

Too many of these conditions are becoming reality. Congress is threatening to force banks to lend, even though no one wants to borrow. Businesses can't move without asking for permission. It is important never to forget these words of wisdom, lest they become prophetic. This February 2nd, go pick up your copy of Atlas Shrugged, or buy one for a friend, and flip through the pages, just for your own benefit. In trying times such as ours, art can give us the resolve to march on, no matter how bleak the future might look.

Happy Birthday Ayn, and thanks.

P.S.: Feel free to post your favorite money speech excerpt if I've failed to include it.

Super Bowl Commercials

2009-02-01T19:40:00.007-05:00

I don't watch the Super Bowl for the football unless the Bears are playing, so this year I'm solely looking at commercials. Here's a compilation of some of the best, as I see them.

Hyundai: Screaming BMW and Lexus executives, "Win one award, and suddenly everybody gets your name right"--Screaming Germans and Japanese businessmen: always funny

E*Trade: I really like this company, and only last year it was on the verge of collapse what with the financial markets imploding. I grant near total credit for the firm's recovery on the E*Trade baby commercials from last Super Bowl, and the company is continuing them this year (3% interest on savings account might also have helped its recovery). That baby is awesome; I vote him for Treasury Secretary.

Priceline.com: Asian guy doing William Shatner impression. Awesome. (I'm still using Expedia, though)

Coca-Cola: I am so glad they got rid of the slogan "The Coke Side of Life." I mean, what marketing genius came up with that? Now it's "Open Happiness." As a devout Coke drinker, I have to agree. Also, the commercial with all the bugs stealing the Coke to tune of "Peter and the Wolf" was just adorable.

Monster.com: Everyone has felt, at one point or another, that their job consisted of staring at a moose's ass.

Careerbuilder.com: Ok, this beat Monster, I think. Punching koalas with glasses. That's all I need to say.

Miller: High Life!

Cash4Gold.com: As any Objectivist will tell you, this is not a good investment. Keep your gold. I'm talking to you, Ed McMahon

Hulu: Alec Baldwin can turn my brain to mush any day of the week.

Finally, the Pespi commercial with McGruber was good, but Pepsi sucks, so it gets no points.

A Few Thoughts on Business Students

2009-01-31T17:33:00.003-05:00

As an undergraduate finance major, I am forced every now and then to come into contact with my fellow business students. A few of them, just like in the population as a whole, are worth meeting. The majority, however, might as well be zombies who stumble around aimlessly on the path their parents haphazardly set out for them...just like in the population as a whole. I pick on the business majors because, theoretically, they should be more aware. Theirs is a vital and demanding profession, like medicine. If the poet laureate is a space cadet, no one dies or loses their life savings. Business professionals need to be on their game.

It is for this reason that a piece of me dies every time I have to engage with one of these intellectual Lilliputians. Recently I was required to play boss to some management students pretending to pitch an idea to me. I was supposed to ask them questions and they would show their communication and persuasion skills. The program they were pitching was called "ROWE" or "Results-Only Working Environment."

A few thoughts on my experience in this activity:

First, no one should ever have to listen to eleven business students try to sell an idea in any 24-hour period. Nothing at Guantanamo could approach that level of agony. Second, I motion that the words "like" and "um" be surgically removed from the brains of anyone with an IQ below 130. End of story.

What really depresses me, though, and what shakes my confidence in humanity to the core, is the fact that three of the eleven students came in, and when I asked them what ROWE, the project they were selling to me, stood for, they could not answer. Let me repeat, they could not tell me the full name of the project they were pitching.

The next captains of industry coming soon to a hedge fund near you!

How Much Is Power Really Worth?

2009-01-30T14:36:00.002-05:00

Last night, Chairman and former CEO of BB&T (and capitalist uber-BAMF), John Allison, gave a speech on the financial crisis in D.C. as part of the Ayn Rand Center for Individual Rights' Lecture Series. The video is not up yet, but this WSJ.com article sums it up:

Allison: BB&T Grabbing Customers From Rivals To Boost Loans

BB&T is one of the only large banks that has increased its lending in recent months, while the industry as a whole is being criticized for taking TARP funds and sitting on them. Obviously, this criticism exposes deep ignorance of the banking business model, but in addition to that, Allison points out that it isn't even the banks' decision:

"The truth is we're mostly moving market share, because a number of our competitors are under pretty severe duress, so we're picking up clients," he told Dow Jones Newswires Thursday.

"It's not that we wouldn't lend to our own clients," he added. "They're just not borrowing."

Go figure that in a recession, after years of incurring debt and splurging, Americans might shy away from borrowing. But, remember, it's still the banks' fault.

In a somewhat related note, I found this MarketWatch piece on how Obama is picking idiots who helped fuel this mess as his clean-up team, instead of bankers who managed to navigate through it. Here are a few nice excerpts:

"The only question I'd have for Allison is if he wanted to run the Treasury or the Fed."

"It [The author's financial dream team] includes Peter Schiff, a regular on business TV shows, who warned against a real estate collapse. Alone, that prediction was hardly unique, but what set Schiff apart was what he forecast as the fallout: deep recession, credit crunch and bank failures. Yes, that sounds familiar."

"There is one knock on all of these candidates: none has any significant government experience.
Of course, judging by the government's performance, you already knew that."

The suggestion of recruiting the talented business minds listed in this article got me thinking about Mr. Thompson from Atlas Shrugged asking John Galt to be economic dictator. Even if one knows the answer (i.e. knows the proper role of government) how exactly would one bring that about in an industry so intricately tied to the government as banking. You'd have to dismantle the Fed. How do you do that without a run on the dollar? These are interesting questions to ponder, and I'm interested in ideas others have on the issue.

Divine Right of Stagnation-Bailout Edition

2009-01-29T14:12:00.002-05:00

The stream of bailouts the federal government has dished out passed ridiculous about a year ago and has now entered a realm the Aldous Huxley could not have imagined even with the aid of his most powerful hallucinogens. Perhaps the porn industry's request for a bailout was more absurd than the latest travesty, but today's example is more insidious:

Rental Car Firms Seek a Bailout

Pertinent tidbits of info are as follows:

"Now, Avis Budget Group Inc., Hertz Global Holdings Inc. and other rental-car companies are lobbying Congress to allow them to use Troubled Asset Relief Program funds to finance new auto purchases. The House of Representatives included a clause in a TARP reform bill that it passed last week to give the government authority to back loans to rental-car companies and other fleet purchasers. The bill has now moved on to the Senate."

"'If our desire is to get car buying and credit flowing again, enabling people who buy hundreds of cars at a time is a good way to do it,' said Steven Adamske, a spokesman for Rep. Barney Frank (D., Mass.), chairman of the House Financial Services Committee."

This just shows that it is not the health of the economy that politicians like the above-mentioned asshole intend to promote with their bailouts. It is the health of the current economy, specifically the businesses that currently exist and have pull in Washington. Barney Frank doesn't want his friends at Avis to lose their jobs. Still, just as with GM and Chrysler, no amount of federal money will make people want to buy their product. Futile though this attempt is, however, it has the much more harmful effect of preventing new, better firms from rising and taking their place. If large banks fail, yes people will lose money. Soon, though, smaller, better-run banks will take their place. When GM and Chrysler go down, smaller more efficient car manufacturers will rise and take their place. That is, of course, unless you stop them by constantly backing their competitors.

You can't bailout a firm that doesn't exist yet, and that firm has no chance because it has no lobbyist in Washington. Politicians would rather bring our economy to a screeching halt than see one of their friends (read: campaign donors) have to look for work. Directive 10-289 is not far behind.

Abortion Letter Published

2009-01-28T00:47:00.003-05:00

Every now and then I read something that is so obvious an affront to anything decent that I feel compelled to respond. The activist in me feels soothed, and I can move on. The latest such event occurred last Friday, when I read this editorial in the Indiana Daily Student:

Stupid Editorial

To my delight, the IDS printed my letter in response here:

Much Better Letter

This one has to do with the double-standard when it comes to abortion. Typical liberals are pro-choice, until that choice involves refusing to perform an abortion, then choice is an antiquated concept. It's hard being consistent. Beat's the alternative, though.

The Curious Case of Warren Buffett

2009-01-27T16:38:00.003-05:00

Warren Buffett is, as the title of this post states, a curious case. (Much more so than Benjamin Button, in my opinion) On the one hand, he is one of the greatest investors of our time, generating many billions of dollars in wealth for himself, his employees, and countless others. On the other hand, he sees no virtue in his wealth creation. He views it as something he does to make a living, and believes that real virtue lies in giving all that wealth away.

Buffett represents far too many businesspeople today; people who show up at work and approach their tasks with a rational pursuit of their own self-interest, and then go home and feel guilty about what they have produced. Theirs is a contradiction of the worst kind, that of confusing virtue for sin, with all the guilty feelings that accompany it. Periodically on this post, I will post two quotes from well-known, financially successful businessmen and -women. One will be an encouraging quote about the individual's rational approach to business, and the other will be a contradicting quote emphasizing that individual's irrational approach to the rest of his life. Unfortunately, there is no shortage of quotes to form such a juxtoposition.

Here is Buffett:

"As far as I am concerned, the stock market doesn't exist. It is there only as a reference to see if anybody is offering to do anything foolish. When we invest in stocks, we invest in businesses. You simply have to behave according to what is rational rather than according to what is fashionable." -Quoted in One up on Wall Street, by Peter Lynch

"But to the extent we did amass wealth, we were totally in sync about what to do with it - and that was to give it back to society.
In that, we agreed with Andrew Carnegie, who said that huge fortunes that flow in large part from society should in large part be returned to society. In my case, the ability to allocate capital would have had little utility unless I lived in a rich, populous country in which enormous quantities of marketable securities were traded and were sometimes ridiculously mispriced. And fortunately for me, that describes the U.S. in the second half of the last century." Quoted in Forbes

Talk about your self-esteem issues.

Inaugural Post

2009-01-26T23:32:00.000-05:00

Well, I finally caved and started a blog. As my field of contacts spreads farther and farther across the globe, I feel it necessary to make sure none of them lacks my unique and valuable insights. As the description for this blog states, I want my friends and acquaintances to feel free to post in the comments section their own thoughts on the material presented. The world today is a dark and scary place, and I feel it my obligation (as well as a fantastic form of catharsis) to try and make sense of it all for the general public. Well, not necessarily the general public. A good way to tell if you're the ideal reader for this blog is if you understand the meaning of its name. If "The Money Speech" doesn't ring any bells, than in addition to reading this blog religiously, you should probably start catching up on your mid-20th century literature. That said, and without further bloviating, the first post:

This article made the front page of the Wall Street Journal today:

http://online.wsj.com/article/SB123293041915314113.html?mod=hps_us_my_companies

Apparently, bank lending fell in the 4th quarter last year among the 20 largest banks. Noticeably deviating from the pack was one of my favorite firms, BB&T. (Get used to that company if you don't know me well. I mention it a lot. Also, in the interest of full disclosure, I own some of their stock.) While the top 20 banks averaged a 1.4% decrease in lending, BB&T managed to increase their lending 2.1%. Then the Journal produces this snippet:

At BB&T, a Winston-Salem, N.C., bank that got $3.13 billion from TARP, fourth-quarter lending volume rose about 2%, or $2 billion. While BB&T is making new loans, Chief Executive Kelly King said the bank invested much of its taxpayer capital as a way to earn a decent return while shunning risk.

"We parked it there, and will redeploy it as quickly as we can, not in a panic," Mr. King said last week on a conference call with analysts. "We're not going to make a bunch of bad loans."

Huh, imagine that. This King guy just took over as CEO this month from god-among-men John Allison, but so far I think I'm going to like him. "Not going to make a bunch of bad loans." Too bad Wamu and Wachovia didn't have crack business acumen like that at their disposal back in 2006.